SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ________
Commission file number: 0-22895
OMEGA RESEARCH, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2223464
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
8700 WEST FLAGLER STREET, MIAMI, FLORIDA 33174
(Address of principal executive offices) (Zip Code)
(305) 551-9991
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT ON MARCH 16, 1998, BASED UPON THE CLOSING
MARKET PRICE OF THE REGISTRANT'S VOTING STOCK ON THE NASDAQ NATIONAL MARKET ON
MARCH 16, 1998 WAS APPROXIMATELY $15,350,000.
THE REGISTRANT HAD 22,246,508 SHARES OF COMMON STOCK, $.01 PAR VALUE,
OUTSTANDING AS OF MARCH 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(SPECIFIC SECTIONS INCORPORATED ARE IDENTIFIED UNDER APPLICABLE ITEMS HEREIN)
CERTAIN PORTIONS OF THE REGISTRANT'S PROXY STATEMENT TO BE FILED IN
CONNECTION WITH ITS 1998 ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY
REFERENCE IN PART III OF THIS REPORT.
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TABLE OF CONTENTS
PAGE NO.
PART I
ITEM 1. BUSINESS..............................................................1
Overview...........................................................1
Recent Developments................................................1
Industry Background................................................1
Products...........................................................3
Sales and Marketing................................................5
Strategic Relationships............................................6
Product Development and Year 2000 Compliance.......................7
Customer Support and Training......................................9
Competition........................................................9
Intellectual Property.............................................10
Employees.........................................................11
ITEM 2. PROPERTIES...........................................................12
ITEM 3. LEGAL PROCEEDINGS....................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS..........................................13
Common Stock Information..........................................13
Dividend Policy...................................................13
Recent Sales of Unregistered Securities...........................14
Use of Proceeds...................................................14
ITEM 6. SELECTED FINANCIAL DATA..............................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................17
Overview .........................................................17
Results of Operations.............................................19
Years Ended December 31, 1997 and 1996............................20
Years Ended December 31, 1996 and 1995............................21
Income Taxes......................................................22
Variability of Results............................................23
Liquidity and Capital Resources...................................23
Recently Issued Accounting Standards..............................25
Year 2000 Compliance..............................................26
Forward-Looking Statements; Business Risks........................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................32
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ITEM 11. EXECUTIVE COMPENSATION...............................................32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................................32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K..................................................33
SIGNATURES....................................................................35
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Omega Research, Inc. ("Omega Research" or the "Company") is a leading
provider of real-time investment analysis software for the Microsoft Windows
operating system. The Company's principal products are TRADESTATION,
OPTIONSTATION and SUPERCHARTS. TRADESTATION enables investors to historically
test the profitability of their own investment and trading strategies and then
computer-automate those strategies to generate real-time buy and sell signals.
OPTIONSTATION enables investors who are not options experts or mathematicians to
benefit from advanced stock, index and futures options trading strategies, and
SUPERCHARTS provides investors with state-of-the-art technical analysis
capabilities. The Company designs its products as PLATFORM APPLICATIONS: unique
software applications that also serve as platforms for independent third-party
solutions. Over 150 independent developers have developed software products for
the Omega Research Platform.
RECENT DEVELOPMENTS
On October 1, 1997, the initial public offering of the Company's Common
Stock commenced, with an aggregate of 3,700,000 shares being offered by the
Company and the selling shareholders at $11.00 per share (the "Initial Public
Offering"). On November 5, 1997, the Initial Public Offering concluded upon the
partial exercise by the underwriters of the over-allotment option granted by the
Company and the selling shareholders. In total, the Company sold 2,758,108
shares at an aggregate offering price of approximately $30.3 million and the
selling shareholders sold 1,166,892 shares at an aggregate offering price of
approximately $12.8 million. The Company received no portion of the net proceeds
of the shares offered by the selling shareholders. The net proceeds of the
shares offered by the Company were approximately $27.4 million, after deducting
costs associated with the Initial Public Offering. For a discussion of the use
of the proceeds of the Initial Public Offering by the Company, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and Note 4 of Notes to Financial Statements.
Prior to the Initial Public Offering, the Company elected for federal and
state income tax purposes to be treated as an S corporation under the Internal
Revenue Code of 1986, as amended (the "Code"), and comparable state tax laws. As
a result, earnings of the Company were taxed for federal and state income tax
purposes directly to the shareholders of the Company, rather than to the
Company. Immediately prior to the Initial Public Offering, and effective on
September 30, 1997, the Company revoked its S corporation election and converted
from an S corporation to a C corporation. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Income Taxes" and
Notes 1 and 7 of Notes to Financial Statements.
INDUSTRY BACKGROUND
In the last 25 years there has been unprecedented growth in the financial
markets as increasing amounts of capital have been actively invested in an
effort to generate superior returns. According to the Investment Company
Institute, total financial assets of U.S. households were $14.0 trillion at the
end of 1995, and are expected to grow to over $22.5 trillion by the year 2000.
Traditionally, financial instruments were held to maturity or for long
investment horizons, but in today's environment of abundant data flow and low
transaction costs, financial instruments are increasingly being actively traded.
Average daily trading volume on the New York Stock Exchange has grown
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from 18.6 million shares in 1975 to 503.5 million shares in 1997. Nasdaq daily
trading volume has grown even faster, from an average of 5.5 million shares in
1975 to 607.9 million shares in 1997.
Increased investment and trading activity is being driven by both
individual and institutional investors. Forrester Research, a market research
firm, estimates that by the year 2000 over $46 billion in financial assets will
be managed over the Internet by individuals. Through the advent of self-directed
401(k) plans and improved awareness and knowledge of the financial markets,
individual investors are increasingly seeking to self-manage their financial
assets. The broad availability of financial information on-line has enabled
individual investors to become more sophisticated and knowledgeable about
investing, having experienced greater access to stock quotes, financial market
data, investment advice and other investment information through the Internet or
through other on-line services. In addition to increased information flows, the
increased popularity and proliferation of discount and on-line brokerage
services have resulted in reduced transaction costs to the individual investor,
thereby facilitating the increase in investment activity.
Investment and trading activity has also increased significantly among
institutional investors, including mutual funds, pension funds, hedge funds,
savings institutions and brokerage firms. According to a report by Putnam,
Lovell & Thorton, a firm that conducts market research on the investment
management industry, total financial assets managed by the U.S. money management
industry grew from $1.4 trillion in 1980 to $10.3 trillion at the end of 1995.
In addition, the number of mutual funds in the United States has doubled from
3,105 in 1990 to 6,293 in 1996. This proliferation of funds, together with
increasing competitiveness among institutions seeking to deliver superior
investment returns to their customers, has contributed to increased investment
and trading activity by institutional investors.
Investors, both individual and institutional, require financial market data
to make their investment or trading decisions. Investors today have access to
large quantities of financial market data increasingly being offered on a
real-time basis at substantially lower cost than ever before. Data are readily
available from a variety of data vendors, including companies such as Dow Jones
Markets, Inc. ("Dow Jones Markets"), ADP, Bloomberg, Bridge Information Systems,
Commodity Quote Graphics, FutureSource, ILX, Reuters and S&P ComStock, all of
which generally serve the institutional market, and BMI, DTN, Dial/Data, PC
Quote, Signal, Telescan and TeleChart 2000, which generally serve the individual
investor market. In addition, the Internet is becoming an increasingly valuable
conduit of information for individual and institutional investors seeking to
support their investment decision-making.
While financial market data have been available for some time, typically
only large institutional investors with access to mainframe or
minicomputer-based systems have had the capability to manipulate, organize and
analyze such data to support their investment decisions. Historically, such
activities have been expensive and time consuming, and usually performed in the
"back office" of institutional investors through custom programming by
information technology professionals. The emergence of easy-to-use powerful
personal computers with standard operating systems has brought analytical
capability to "front office" decision makers of institutional investors, as well
as to individual investors who historically have not had access to such
technology or information.
With the advanced processing capabilities of today's personal computers,
both individual and institutional investors are demanding powerful investment
analysis software to improve their investment decision-making. Historically,
investment analysis software for the personal computer has generally been
limited to passive charting and analysis. However, as vast new quantities and
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types of financial market data have become available, a need has arisen for
decision support software which enables investors to analyze market data in new
and powerful ways, including the design, testing and validation of custom
investment strategies and the implementation of those strategies in real time.
Investors are seeking to leverage quantitative data to make improved investment
decisions through the use of software solutions which provide powerful
investment analysis capabilities, open and extendible software platforms,
support for a wide variety of financial instruments and markets, and ease of
use.
PRODUCTS
The Company's investment analysis software products, each of which operates
in a Microsoft Windows environment, are currently marketed to individual
investors and, through Dow Jones Markets, to institutional investors. Products
marketed directly by the Company are technically compatible with data feeds and
services offered by BMI, Dial/Data, FutureSource, Signal, S&P ComStock and
Telescan, and are currently offered with a historical financial market database
on CD-ROM containing up to 25 years of history on each security and index
included in the database. The compatibility of the Company's products with data
feeds may differ from time to time as the Company introduces new products and
new versions of existing products. Each of the Company's principal products
operates on real-time, delayed and end-of-day data, except for the end-of-day
version of SUPERCHARTS.
The Company develops its principal products as "platform applications,"
unique and valuable software applications that also serve as platforms for
third-party solutions which add value to the products (collectively, the "Omega
Research Platform"). The Omega Research Platform is designed to be open and
extendible, encouraging the development of as many complementary third-party
solutions as possible. To date, more than 150 independent software developers
("Omega Research Solution Providers") have developed specific trading systems or
other investment applications for the Omega Research Platform.
The Company designs its products to benefit investors in a variety of
financial markets, including investors in equities, futures, foreign currencies
and options. Within each of these segments, investors can use the products to
fit their special needs and levels of experience. The Company believes that many
of its customers are active in multiple financial markets and, as a result, has
designed different products to address different markets which can be used
independently or in combination. For example, the Company currently markets
TRADESTATION PROSUITE, comprised of TRADESTATION and OPTIONSTATION.
Omega Research's principal products are:
<TABLE>
Latest
Initial Version Current
Product Operating System List Price Release Date Release Date Version
------- ---------------- ---------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C>
TRADESTATION Microsoft Windows $2,399 1991 1996 4.0
OPTIONSTATION Microsoft Windows $1,799 1996 1996 1.2
SUPERCHARTS REAL-TIME Microsoft Windows $1,199 1996 1996 4.0
SUPERCHARTS END-OF-DAY Microsoft Windows $ 395 1992 1996 4.0
</TABLE>
TRADESTATION. TRADESTATION is the flagship product of the Company, serving
as a platform for numerous third-party software solutions. TRADESTATION is
marketed to serious equities, futures and foreign currency investors.
TRADESTATION empowers the investor to design and develop custom
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trading systems based upon the investor's own investment ideas and strategies,
test the profitability of such trading systems against historical data, and then
computer-automate a chosen trading system to monitor the applicable market and
alert the investor in real-time when the criteria of the trading system have
been met and an order should, therefore, be placed. If the investor is not at
the computer terminal when a buy or sell signal is generated, TRADESTATION can
automatically notify the investor via an alpha-numeric pager if the necessary
equipment and software have been installed. The principal features of
TRADESTATION which enable the investor to design and develop custom trading
strategies and systems are EASYLANGUAGE and the POWEREDITOR. EASYLANGUAGE is a
proprietary computer language developed by Omega Research consisting of
English-like statements which can be input by the investor to describe
particular trading ideas and strategies. The POWEREDITOR is a compiler of
EASYLANGUAGE statements and provides the investor with considerable flexibility
to modify and combine different trading rules and strategies which ultimately
result in the design of the investor's custom trading systems.
OPTIONSTATION. OPTIONSTATION is an options trading analysis product for
stock, index and futures options which enables investors who are not options
analysis experts or mathematicians to explore complex trading strategies.
Specifically, OPTIONSTATION is designed to sort through thousands of possible
options positions and identify the most favorable risk-reward profile based upon
user-defined assumptions. OPTIONSTATION is designed to perform two critical
tasks of options trading--position search and position analysis. OPTIONSTATION's
Position Search helps the investor find the best risk-reward profile based upon
the investor's market assumptions. The Power Spreadsheet and Position Chart
features enable investors to design and customize options positions and then
graphically view and analyze each position's profitability and risk. If the
investor is using OPTIONSTATION with a real-time data feed, the program will
alert the investor when the investor's specified criteria have been met. Also,
the investor can be notified of the alert via an alpha-numeric pager if the
necessary equipment and software have been installed.
SUPERCHARTS. SUPERCHARTS is Omega Research's technical analysis charting
product and is available in both real-time and end-of-day versions. SUPERCHARTS
has a built-in library of more than 80 popular technical indicators and 15
drawing tools that highlight significant market patterns. SUPERCHARTS provides
the investor with sophisticated charting and technical analysis capabilities,
including the ability to draw trend lines, identify chart patterns and chart
historical fundamental data. SUPERCHARTS can generate an alert on a real-time or
end-of-day basis when a simple user-defined criterion occurs with respect to a
specific security. SUPERCHARTS also contains certain trading system design and
testing capabilities in order to introduce the less-experienced investor to such
functions and potentially generate interest in the Company's TRADESTATION
product. EASYLANGUAGE is included to a limited degree in SUPERCHARTS.
ADDITIONAL PRODUCTS AND SERVICES. The Company offers additional products
and services, such as WALL STREET ANALYST, the Company's introductory charting
and analysis product for the individual investor, historical data subscription
CD-ROM clubs (monthly deliveries of historical financial data updates on
CD-ROM), and seminars, conferences, tutorials and instructional videotapes
designed to enhance investors' abilities to use fully and effectively the
Company's products. In addition, the Company has recently begun to market
investment analysis products (software, videotapes, and/or seminars) of
well-known traders, sharing with such traders revenues or profits from such
promotions. Further, during the last week of March 1998, the Company commenced
the marketing of PORTFOLIO MAXIMIZER, a software application that is used to
evaluate trading systems developed with TRADESTATION or SUPERCHARTS. See
"Business - Strategic Relationships - SOFTWARE DEVELOPERS." These
additional products and services are intended to complement the Company's
principal investment analysis products. Additional products and services
currently
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account for a minor portion of the Company's revenues; however, the
Company has begun to focus more on these types of products and anticipates that
revenues from additional products and services will increase over time.
SALES AND MARKETING
The Company believes one of its most important assets and a key competitive
advantage is its installed base of TRADESTATION, OPTIONSTATION and SUPERCHARTS
customers. The Company believes that significant opportunity exists to leverage
this customer base by (i) selling product upgrades to customers who own the
earlier version of the product, (ii) selling additional existing products to
customers who do not own those products, and (iii) marketing new products to its
entire installed customer base.
The Company markets its products using a combination of methods, including
inbound telesales and the use of domestic and international distributors and
other resellers, including value added resellers. Marketing efforts in support
of sales include print media and television advertising, direct mail, seminars
and establishment of strategic marketing and other strategic partner
relationships with data vendors, on-line brokerages and software and service
solution providers.
The majority of the Company's direct product sales is generated by
telesales. The Company has devoted considerable efforts and resources to
assemble and train a dedicated, professional, team-oriented sales force. The
telesales process consists of the generation of leads through media and direct
mail advertising, fulfillment of information packets to prospective purchasers,
and follow-up calls to the recipients of the information packets to attempt to
complete the sale. The Company is in the process of implementing a new system of
customer tracking and management at its corporate headquarters to improve its
lead management capability, enhance its customer satisfaction through increased
responsiveness and to improve its ability to market additional products to
existing customers.
The Company advertises its products in publications popular with investors
such as BARRON'S, FUTURES, INDIVIDUAL INVESTOR, INVESTORS BUSINESS DAILY and
STOCKS & COMMODITIES. The Company also advertises TRADESTATION and OPTIONSTATION
on a regular basis on the CNBC and CNN-FN television networks, and certain local
television stations. The Company undertakes periodic promotional mailings to its
customer base, as well as to mailing lists obtained by the Company by license
from, or agreement with, third parties. Such promotional mailings may include
flyers, brochures, videotapes and demo CDs. In addition, in the fourth quarter
of 1997 the Company began publishing OMEGA RESEARCH MAGAZINE, a quarterly
periodical that contains articles and features on system trading and development
and advertises the Company's products and those of its solution providers. The
magazine is currently distributed free of charge to the Company's installed
customer base.
The Company has developed a presence in the institutional investor market
through its relationship with Dow Jones Markets. TRADESTATION was introduced by
Dow Jones Markets to institutional investors in January 1996 as DOW JONES
TRADESTATION. Dow Jones Markets has also acquired from the Company the right to
market SUPERCHARTS as DOW JONES SUPERCHARTS to its data subscribers on a
worldwide basis. The Company believes that relationships with data vendors, such
as the Dow Jones Markets relationship, will facilitate the Company's efforts to
increase the use of its products by institutional investors. In addition,
certain individual investors who use the Company's products are employees of
institutions, which the Company believes increases awareness of the Company's
products in the institutional market. The Company anticipates that the
not-yet-
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released 32-bit versions of its products will ultimately support a network
environment. This capability would permit the Company, from a technical
standpoint, to market its principal products directly to institutions. The
latest version of DOW JONES TRADESTATION, released by Dow Jones Markets in the
fourth quarter of 1997, is a 32-bit application.
The Company intends to continue to focus on expanding its international
presence and sales by continuing to develop its network of international
independent distributors of Omega Research products. As of December 31, 1997,
Omega Research had arrangements with approximately 60 independent parties to
distribute one or more of the Company's products in Europe, Asia, Australia,
South Africa and Canada. The Company also sells directly to international
investors in response to direct inquiries received from abroad. The Company
believes that its strategic relationships with data vendors, such as Dow Jones
Markets, may be beneficial in its efforts to expand in the international market.
The Company is in the early stages of its international sales and marketing
efforts and, therefore, no assurance can be given that these efforts will be
successful.
STRATEGIC RELATIONSHIPS
Omega Research endeavors to establish and foster strategic marketing and
other strategic partner relationships with data vendors, software and service
solution providers, on-line brokerages and third-party software developers.
DOW JONES MARKETS AGREEMENTS. In August 1994, the Company entered into a
Software License, Maintenance and Development Agreement with Dow Jones Markets
(then known as Dow Jones Telerate, Inc.) under which Omega Research licensed to
Dow Jones Markets the right to market and distribute TRADESTATION to its data
subscribers worldwide, who are primarily institutional investors. The Company,
in March 1997, entered into a similar agreement with Dow Jones Markets regarding
SUPERCHARTS Real-Time. Following the execution of the TRADESTATION agreement,
Omega Research developed modifications to tightly integrate TRADESTATION with
Dow Jones Markets' data server. In January 1996, DOW JONES TRADESTATION was
launched by Dow Jones Markets. The Company believes the Dow Jones Markets
relationship has begun to create an institutional market awareness of the
Company's products which should support the Company's marketing efforts with
respect to both the institutional and international markets.
The Dow Jones Markets agreements expire in the year 2002. The TRADESTATION
agreement requires Dow Jones Markets to use commercially reasonable efforts to
market TRADESTATION, to market the product under the name "DOW JONES
TRADESTATION," and to pay to Omega Research a per-subscription royalty, subject
to minimum annual royalties which escalate each year of the agreement. The
Company has no technical support obligation under the agreement to the customers
of Dow Jones Markets, but is obligated to provide limited technical support to
Dow Jones Markets' managers. The SUPERCHARTS agreement is similar but does not
contain a minimum royalty payment provision or require Dow Jones Markets to
observe a marketing efforts standard. To date, marketing of SUPERCHARTS by Dow
Jones Markets has not commenced, and there can be no assurance to what extent,
if any, Dow Jones Markets will actively market SUPERCHARTS.
During the term of the Dow Jones Markets agreements, Omega Research is not
permitted to enter into a similar licensing arrangement regarding TRADESTATION
with five enumerated competitors of Dow Jones Markets. Dow Jones Markets is not
prohibited by either agreement from offering to its data service subscribers its
own or another company's investment analysis software.
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In late March 1998, it was announced that Dow Jones Markets is to be sold
to Bridge Information Systems, Inc. ("Bridge Information Systems"). There can be
no assurance that such sale, if consummated, would not have a material adverse
effect on the transactions contemplated by the Dow Jones Markets agreements.
CROSS-MARKETING AGREEMENTS. The Company currently has written agreements
with other data vendors, some of which provide for the data vendor to pay the
Company monthly fees or commissions as consideration for data subscribers who
use Omega Research products to access such data vendors' data services. Each of
these agreements contains provisions designed to make the data vendors'
subscribers more aware of Omega Research's products and to make Omega Research's
customers more aware of the data vendors' services. In addition, in January 1998
the Company entered into a cross-marketing agreement with E*Trade Group, Inc.
which provides for direct mail promotions to each other's customer lists and
other cross-marketing benefits.
OMEGA RESEARCH SOLUTION PROVIDER NETWORK. More than 150 independent
software and service providers have become Omega Research Solution Providers.
Omega Research Solution Providers add value to the Omega Research Platform by
either offering complementary software applications compatible with an Omega
Research product or by providing an educational or support service which
enhances a customer's use of a Company product. A number of the Omega Research
Solution Providers have developed products that operate only in conjunction with
an Omega Research product. The Company permits each Omega Research Solution
Provider to use an Omega Research Solution Provider logo on a royalty-free basis
so that the solution provider can advertise to potential customers that its
product or service is compatible with the applicable Omega Research product(s)
or useful to Omega Research customers.
SOFTWARE DEVELOPERS. In January 1998, the Company entered into an agreement
(the "RINA Agreement") with RINA Systems, Inc. ("RINA"), a software developer
that specializes in the development of portfolio and performance evaluation
software products, to develop such types of products for and with the Company.
During the last week of March 1998, the Company released PORTFOLIO MAXIMIZER,
the first of such products. The RINA Agreement has a term of 10 years, during
which RINA has the right, but not the obligation, to offer to license to the
Company, on an exclusive, perpetual basis, investment analysis software products
developed by RINA. If the Company accepts the exclusive license, the Company
then has the exclusive right to market the product under a Company brand. RINA
is paid a royalty based upon net revenues derived from each such license. During
the term of the RINA Agreement, RINA may not offer to license its products to
the Company's competitors or engage in activities competitive with the Company.
Although no assurances can be given, RINA has indicated to the Company that it
intends to offer to license to the Company all products on which it is now
working, as well as those that it may develop in the foreseeable future.
PRODUCT DEVELOPMENT AND YEAR 2000 COMPLIANCE
The Company believes that its future success depends in part on its ability
to maintain and improve its core software technologies, enhance and develop new
versions of its existing products and develop new products that meet an
expanding range of customer requirements. To date, with the exception of the
RINA Agreement, the Company has relied primarily on internal development of its
products, all of which are currently 16-bit Windows applications. The Company
performs all quality assurance and develops documentation and other training
materials internally. In 1997 and 1996, product development expenses were
approximately $1.9 million and approximately $1.0 million, respectively.
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The Company views its product development cycle as a four-step process to
achieve technical feasibility. The first step is to conceptualize in detail the
defining features and functions that the targeted investor group requires from
the product, and to undertake a cost-benefit analysis to determine the proper
scope and integration of such features and functions. Once the functional
requirements of the product have been determined, the second step is to
technically design the product. The third step is the detailed implementation,
or software engineering, of this technical design. The fourth step is rigorous
quality assurance testing to ensure that the final product generally meets the
functional requirements determined in the first step. Several product
refinements are typically added in the quality assurance phase of development.
Once this process is completed, technological feasibility has been achieved and
the working model is available for final testing.
The Company is in the process of completing the next versions of
TRADESTATION, OPTIONSTATION and SUPERCHARTS. All of these will be 32-bit
versions which are intended ultimately to support a network environment, which
would technically enable the marketing of the products by the Company directly
to institutional investors. The next versions of TRADESTATION, OPTIONSTATION and
SUPERCHARTS will contain a number of new features which will enhance their
existing functionality and provide new functionality. Although no assurances can
be given, the Company anticipates that the first release of the 32-bit versions
of TRADESTATION and OPTIONSTATION will occur near the end of the Company's
second fiscal quarter, and anticipates that the first release of the new version
of SUPERCHARTS will occur prior to the end of the Company's third fiscal
quarter. The Company is currently considering additional enhancements to its
product line, including increased interactivity between TRADESTATION and
OPTIONSTATION, historical data enhancement products and services, and a software
solution which offers additional trading system design, testing and automation
capabilities for the equities investor.
The market for investment analysis software is characterized by rapidly
changing technology, evolving industry standards in computer hardware,
programming tools, programming languages, operating systems, database technology
and information delivery systems, changes in customer requirements and frequent
new product introductions and enhancements. The Company's future success will
depend upon its ability to maintain and develop competitive technologies, to
continue to enhance its current products and to develop and introduce new
products in a timely and cost-effective manner that meet changing conditions
such as evolving customer needs, new competitive product offerings, emerging
industry standards and changing technology. There can be no assurance that the
Company will be able to develop and market, on a timely basis, if at all,
product enhancements or new products that respond to changing market conditions
or that will be accepted by investors. Any failure by the Company to anticipate
or to respond quickly to changing market conditions, or any significant delays
in the development or introduction of new products and/or enhancements, could
cause customers to delay or decide against purchases of the Company's products
and would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is in the process of assessing the extent of the modifications
that will be required for the most current shipping versions of its products to
support the use of such products with respect to dates occurring on or after
January 1, 2000. The Company does not believe that such modifications will
involve material expenditures of funds or internal resources. In general, the
Company's existing products utilize Julian dating, in which each day is
identified sequentially, as opposed to being identified as a two-digit date for
the particular year. However, the Company's existing products do permit users to
enter dates using the two-digit year format. The Company intends to offer this
year, free of charge, a service pack to customers owning the most current
8
<PAGE>
shipping versions of its products, which will permit recognition of dates beyond
the year 2000. This modification may eliminate a user's ability to analyze early
twentieth century data. The Company anticipates that year 2000 modifications to
the most current shipping versions of its products will be completed during
1998, but there can be no assurance that unanticipated difficulties will not
delay the Company's year 2000 efforts, or that such modifications will not
adversely affect existing functionality of the products in ways not currently
anticipated by the Company. The Company will not be providing year 2000
modifications for versions of its products that were introduced earlier than the
most current shipping versions.
The Company's 32-bit versions of its products, which the Company expects to
release in the second and third quarters of 1998, are expected to be year 2000
compliant when they are introduced.
CUSTOMER SUPPORT AND TRAINING
The Company provides customer support and product-use training in the
following ways:
CUSTOMER SUPPORT. The Company provides technical support to its customers
by telephone, electronic mail and fax. The majority of these services are
provided during the first sixty days of ownership of a Company product and the
related costs associated with such support are accrued at the date of sale. The
Company has substantially increased its technical support staff, which as of
December 31, 1997 has grown approximately 116% since December 31, 1995 and
approximately 78% since December 31, 1996.
PRODUCT-USE TRAINING. The Company considers product-use training important
in trying to ensure that its customers develop the ability to use Omega
Research's products as fully and effectively as is possible. The Company has
devoted considerable efforts to improve the user-education manuals and videos
generally included with its products. In addition, the Company has recently
embarked on a training seminar program to better educate its customers which
consists of fee-based seminars to be conducted in various U.S. cities.
COMPETITION
The market for investment analysis software is intensely competitive and
rapidly changing. The Company believes that due to anticipated growth of the
market for investment analysis software, and other factors, competition will
substantially increase and intensify in the future. The Company believes its
ability to compete will depend upon many factors both within and outside its
control, including the timing and market acceptance of new products and
enhancements developed by the Company and its competitors, product
functionality, data availability, ease of use, pricing, reliability, customer
service and support, sales and marketing efforts and product distribution
channels. The Company believes that it currently competes favorably overall with
respect to these factors.
The Company faces direct competition from several publicly-traded and
privately-held companies. The Company's principal competitors include AIQ, Aspen
Graphics, Equis International, Inc. (Metastock), a subsidiary of Reuters,
TeleChart 2000 and Window on Wall Street Inc. In the fourth quarter of 1997,
Window on Wall Street released Day Trader, a product which it has positioned
against TRADESTATION in its marketing efforts. The Company believes that Day
Trader is more appropriately viewed as competitive with SUPERCHARTS REAL TIME.
However, Window on Wall Street recently announced that it will be releasing Day
Trader Pro, an enhanced version of Day Trader that may permit a user who knows
EASYLANGUAGE to develop personal trading systems using
9
<PAGE>
Day Trader Pro. The Company also competes with investment analysis solutions
available on the Internet, some of which are available for free, and believes
that investment analysis software that is available on the Internet either for
free or at modest prices will increase in sophistication over time. In addition,
the Company faces competition from data vendors, all of which offer investment
analysis software products, and on-line brokerage services, some of which offer
or which may soon offer Internet-based investment analysis software products.
These data vendors and on-line brokerages are the Company's existing and
potentially future strategic partners. As a result, the Company must educate
prospective customers as to the potential advantages of the Company's products,
and continue to offer software solutions not offered by major data vendors or
on-line brokerage services. There can be no assurance that the Company will be
able to compete effectively with its competitors, adequately educate potential
customers to the benefits that the Company's products provide, or continue to
offer such software solutions.
Many of the Company's existing and potential competitors, which include
large, established software companies which do not currently focus on the
investment analysis software market, have longer operating histories,
significantly greater financial, technical and marketing resources, greater name
recognition and a larger installed customer base than has the Company. One or
more of these competitors may be able to respond more quickly to new or emerging
technologies or changes in customer requirements, or to devote greater resources
to the development, promotion and sale of their products than may the Company.
There can be no assurance that the Company's existing or potential competitors
will not develop products comparable or superior to those developed by the
Company or adapt more quickly than the Company to new technologies, evolving
industry trends or changing customer requirements. Increased competition could
result in price reductions, reduced margins or loss of market share, any of
which could materially adversely affect the Company's business, results of
operations and financial condition. There can be no assurance that the Company
will be able to compete successfully against current or future competitors, or
that competitive pressures faced by the Company will not have a material adverse
effect on its business, financial condition and results of operations.
INTELLECTUAL PROPERTY
The Company's success is heavily dependent on its proprietary technology.
The Company views its software as proprietary, and relies on a combination of
copyright, trade secret and trademark laws, nondisclosure agreements and other
contractual provisions and technical measures to establish and protect its
proprietary rights. The Company has no patents or patents pending, and has not
to date registered any of its copyrights. The Company has obtained registrations
in the United States and Canada for the trademarks TRADESTATION and
OPTIONSTATION, and registrations in the United States for the trademark
SUPERCHARTS, and is seeking registrations in the United States for the
trademarks EASYLANGUAGE, POWEREDITOR, Omega Research and certain Omega Research
designs and logos. The Company uses a shrink-wrap license (typically on its
packaging and on-screen) directed to users of its products in order to protect
its copyrights and trade secrets and to prevent such users from commercially
exploiting such copyrights and trade secrets for their own gain. Since these
licenses are not signed by the licensees, many authorities believe that they may
not be enforceable under many state laws and the laws of many foreign
jurisdictions. The laws of Florida, which such licenses purport to make the
governing law, are unclear on this subject.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties copy or otherwise obtain, use or exploit the Company's
products or technology independently. Policing unauthorized use of the Company's
products is difficult, and the Company is unable to determine
10
<PAGE>
the extent to which piracy of its software products exists. Piracy can be
expected to be a persistent problem, particularly in international markets and
as a result of the growing use of the Internet. In addition, effective
protection of intellectual property rights may be unavailable or limited in
certain countries, including some in which the Company may attempt to expand its
sales efforts. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technologies or products.
There has been substantial litigation in the software industry involving
intellectual property rights. The Company does not believe that it is infringing
the intellectual property rights of others, although there exists a competing
trademark application for the name WALL STREET ANALYST which claims prior use,
and a notice of opposition to the Company's registration of WALL STREET ANALYST
has been filed. There can be no assurance that infringement claims would not
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, to the extent that the Company acquires
or licenses a portion of the software or data included in its products from
third parties or markets products licensed from others generally, its exposure
to infringement actions may increase because the Company must rely upon such
third parties for information as to the origin and ownership of such acquired or
licensed software or data. In the future, litigation may be necessary to
establish, enforce and protect trade secrets, copyrights, trademarks and other
intellectual property rights of the Company. The Company may also be subject to
litigation to defend against claimed infringement of the rights of others or to
determine the scope and validity of the intellectual property rights of others.
Any such litigation could be costly and divert management's attention, either of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Adverse determinations in such litigation
could result in the loss of proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third
parties, which could be expensive, or prevent the Company from selling its
products or using its trademarks, any one of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1997, the Company had 139 full-time equivalent employees
consisting of 29 in product development (including software engineering, product
management, documentation and quality assurance), 89 in sales and marketing
(including sales, marketing, customer support and order fulfillment), and 21 in
general administration (including executive management, finance and
administration). The Company's employees are not represented by any collective
bargaining organization, and the Company has never experienced a work stoppage
and considers its relations with its employees to be good.
The Company's future success depends, in significant part, upon the
continued service of its key senior management, technical and sales and
marketing personnel. The loss of the services of one or more of these key
employees, including William R. Cruz or Ralph L. Cruz, the Company's Co-Chief
Executive Officers, or Peter A. Parandjuk, the Company's Vice President of
Product Development, would have a material adverse effect on the Company. There
can be no assurance that the Company will be able to retain its key personnel.
Departures and additions of personnel, to the extent disruptive, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
11
<PAGE>
ITEM 2. PROPERTIES.
The Company's corporate headquarters are located in Miami, Florida, in a
leased facility consisting of approximately 17,300 square feet of office space
occupied under a lease which commenced in February 1997 and which expires in
August 2002. The Company also leases approximately 1,100 square feet of space in
Boca Raton, Florida from which the Company conducts certain ancillary
operations. Such lease expires in June 1998, and the Company has a one-year
renewal option. The Company also leases warehouse space consisting of
approximately 4,800 square feet, which is used for fulfillment of orders. The
warehouse lease expires in May 1998. The Company's corporate headquarters
contain all of the Company's facilities except for fulfillment and ancillary
operations. The Company believes that its existing facilities are adequate to
support its existing operations and that, if needed, it will be able to obtain
suitable additional facilities on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
On January 28, 1998, a class action lawsuit, captioned RICHARD M. RHODES V.
WILLIAM R. CRUZ; RALPH L. CRUZ; OMEGA RESEARCH, INC.; BANCAMERICA ROBERTSON
STEPHENS; LEHMAN BROTHERS; AND HAMBRECHT & QUIST (Case No. 98-0174-CIV-Lenard),
was filed in the United States District Court for the Southern District of
Florida. The suit alleges that the defendants violated Section 11 of the
Securities Act of 1933 (the "Securities Act") by allegedly making
misrepresentations and omissions of material facts in connection with the
Initial Public Offering of the Company's Common Stock and in connection with the
Company's financial condition. The alleged misrepresentations and omissions
concern, among other things, the receipt of proceeds of the Initial Public
Offering by William R. Cruz and Ralph L. Cruz and the Company's TRADESTATION
sales. The suit also alleges that William R. Cruz and Ralph L. Cruz violated
Section 15 of the Securities Act based on the same alleged conduct as described
above.
The plaintiff seeks certification of a class consisting of all persons who
purchased the Company's Common Stock in the Initial Public Offering or between
October 4, 1997 and January 6, 1998, inclusive. Excluded from the class are the
defendants, members of their immediate families, any persons, firm, trust
corporation, officer or director or other individual or entity in which a
defendant has a controlling interest or which is related to or affiliated with a
defendant and the legal representatives, agents, affiliates, heirs, successors
in interest or assigns of any such excluded party. On behalf of himself and the
class, the plaintiff seeks damages, interest, costs and expenses, including
attorneys' and experts' fees and other appropriate relief.
The Company believes that this lawsuit is without merit and intends to
contest the lawsuit vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
COMMON STOCK INFORMATION
The Company's Common Stock, par value $.01 per share, is quoted under the
symbol "OMGA" on The NASDAQ Stock Market (NASDAQ National Market).
The Company completed the Initial Public Offering pursuant to a Registration
Statement that was declared effective on September 30, 1997 at an offering price
of $11.00 per share. Prior to the Initial Public Offering, the Company's Common
Stock was not listed or traded on any organized market system. The high and low
closing sales prices for the Company's Common Stock on The NASDAQ Stock Market
during its fourth fiscal quarter of 1997 (October 1, 1997 through December 31,
1997) (the only period during 1997 when the Company's Common Stock was publicly
traded) were $11.50 and $4.875, respectively. The NASDAQ Stock Market quotations
are based on actual transactions and not bid prices.
As of March 16, 1998, there were 31 holders of record of the Common Stock,
and, based upon information previously provided to the Company by depositories
and brokers, the Company believes it has in excess of 2,800 beneficial owners.
DIVIDEND POLICY
The Company currently intends to retain future earnings to finance its
growth and development and therefore does not anticipate paying any cash
dividends in the foreseeable future. Payment of any future dividends will depend
upon the future earnings and capital requirements of the Company and other
factors which the Board of Directors considers appropriate. During 1997, 1996
and 1995, the Company distributed cash dividends in the aggregate amount of
$16.5 million (including the Dividend described in the following paragraph which
was paid immediately prior to the consummation of the Company's Initial Public
Offering), $5.2 million and $2.2 million, respectively, to the then current
shareholders of the Company. Additionally, during the second quarter of 1997,
the Company declared a dividend to the then current shareholders of the Company,
William R. Cruz and Ralph L. Cruz, of the Company's former office facilities
located at 9200 Sunset Drive, Miami, Florida 33173. The carrying value of the
facility on the Company's books was approximately $507,000.
Of the total amount of dividends paid in 1997, the Company's Board of
Directors declared and paid a dividend of $15.4 million to the Company's then
existing shareholders (the "Dividend") immediately prior to the consummation of
the Initial Public Offering. The Dividend was equal to the Company's estimate at
that time of its cumulative taxable income prior to its conversion to a C
corporation to the extent such taxable income had not been previously
distributed. Subsequent to the payment of the Dividend, the Company
preliminarily determined that the actual cumulative taxable income would be less
than was originally estimated. Accordingly, in the fourth quarter of 1997, the
recipients of the Dividend repaid $800,000, plus interest, to the Company,
reducing the Dividend to $14.6 million. The Dividend is subject to further
adjustment based on actual cumulative taxable income as finally determined. See
Note 4 of Notes to Financial Statements.
13
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
On December 15, 1997, in connection with his initial appointment to the
Board of Directors, the Company issued to Brian D. Smith options to purchase
12,000 shares of Common Stock. Such options vest ratably over a three-year
period and are exercisable at a price of $6.00 per share, which was the fair
market value of the Company's Common Stock on the date on which the options were
granted. The options issued to Mr. Smith were granted under the Company's 1997
Nonemployee Director Stock Option Plan, as amended, and expire, if they remain
unexercised, on the tenth anniversary of the date on which they were granted.
In addition, on December 22, 1997, the Company issued to 30 employees
options to purchase an aggregate of 120,000 shares of Common Stock. All such
options vest ratably over a five-year period and are exercisable at a price of
$5.00 per share, which was the fair market value of the Company's Common Stock
on the date on which the options were granted. The options issued to these
employees were granted under the Company's Amended and Restated 1996 Incentive
Stock Plan and expire, if they remain unexercised, on the tenth anniversary of
the date on which they were granted.
All the foregoing options were granted by the Company in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act.
Other than as described above, the Company did not issue or sell any
unregistered securities during the fourth quarter of 1997.
USE OF PROCEEDS
The Initial Public Offering was effected pursuant to a Registration
Statement on Form S-1 (File No. 333-32077) which was declared effective by the
Securities and Exchange Commission on September 30, 1997. For a discussion of
the use of proceeds of the Initial Public Offering, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and Note 4 of Notes to Financial Statements.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are qualified by reference to and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Financial
Statements and Notes thereto included elsewhere in this report. The Statement of
Income Data presented below for each of the years in the three-year period
ended December 31, 1997 and the Balance Sheet Data as of December 31, 1997 and
1996 have been derived from the Company's Financial Statements included on pages
F-1 through F-17 of this report, which have been audited by Arthur Andersen LLP.
The Statement of Income Data presented below for the years ended December 31,
1994 and 1993 and the Balance Sheet Data as of December 31, 1995 and 1994 have
been derived from audited financial statements not included herein. The Balance
Sheet Data as of December 31, 1993 has been derived from the unaudited financial
statements of the Company. In the opinion of management, the unaudited financial
statements include all adjustments (consisting only of normal and recurring
adjustments) necessary for a fair presentation of its financial position for
such period.
<TABLE>
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Revenues:
<S> <C> <C> <C> <C> <C>
Licensing fees ............................... $ 24,365 $ 13,943 $ 7,913 $ 7,853 $ 5,593
Other revenues ............................... 4,861 3,877 1,502 707 --
-------- -------- -------- -------- --------
Total revenues .......................... 29,226 17,820 9,415 8,560 5,593
-------- -------- -------- -------- --------
Operating expenses:
Cost of licensing fees ....................... 1,849 1,717 876 831 377
Product development .......................... 1,890 1,041 652 492 320
Sales and marketing .......................... 11,272 5,618 3,561 2,712 1,832
General and administrative ................... 5,421 2,422 1,038 798 657
-------- -------- -------- -------- --------
Total operating expenses ................ 20,432 10,798 6,127 4,833 3,186
-------- -------- -------- -------- --------
Income from operations ....................... 8,794 7,022 3,288 3,727 2,407
Other income, net ............................... 146 60 24 18 31
-------- -------- -------- -------- --------
Income before income taxes ................... 8,940 7,082 3,312 3,745 2,438
Income tax benefit .............................. (934) -- -- -- --
--------- -------- -------- -------- --------
Income before pro forma income tax adjustments 9,874 7,082 3,312 3,745 2,438
Pro forma income taxes (1) ...................... 3,256 2,797 1,308 1,479 963
Non-recurring tax credit (2) .................... 1,167 -- -- -- --
--------- -------- -------- -------- --------
Pro forma net income (1)(2) ..................... $ 5,451 $ 4,285 $ 2,004 $ 2,266 $ 1,475
======== ======== ======== ======== ========
Pro forma earnings per share: (1)(2)
Basic ........................................ $ 0.27 $ 0.22 $ 0.10 $ 0.12 $ 0.08
Diluted ...................................... $ 0.26 $ 0.21 $ 0.10 $ 0.11 $ 0.07
Weighted average shares outstanding:
Basic ........................................ 20,172 19,480 19,480 19,480 19,480
Diluted ...................................... 20,885 20,541 20,541 20,541 20,541
</TABLE>
15
<PAGE>
<TABLE>
December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............................ $12,324 $ 142 $ 311 $ 129 $ 368
Working capital...................................... 24,170 3,629 1,997 936 705
Total assets......................................... 27,470 5,803 3,288 2,197 1,810
Shareholders' equity ................................ 25,233 4,835 2,970 1,811 1,534
</TABLE>
- ------------------
(1) The Company was treated as an S corporation for federal and state income
tax purposes prior to September 30, 1997. Pro forma income taxes have been
provided as if the Company had been a C corporation for all periods prior
to September 30, 1997.
(2) Upon terminating its S corporation election, the Company was required to
record a non-recurring credit. See Note 7 of Notes to Financial Statements.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "SELECTED FINANCIAL
DATA," THE FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS CONTAINED
HEREIN.
OVERVIEW
Omega Research, founded in 1982, is a leading provider of real-time
investment analysis software to individual investors. In addition, the Company's
principal product was introduced to institutional investors by Dow Jones Markets
in January 1996.
The Company's revenues are derived principally from two sources: (i)
licensing fees for use of the Company's software products, and (ii) other
revenues consisting primarily of royalties, fees and commissions paid to the
Company in accordance with its agreements with third-party data vendors and
on-line brokers. Licensing fees are recognized upon product shipment in
accordance with Statement of Position ("SOP") 91-1, SOFTWARE REVENUE
RECOGNITION. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Recently Issued Accounting Standards." While the
Company has no obligation to perform future services subsequent to shipment, the
Company voluntarily provides telephone, electronic mail and fax customer support
to purchasers of its products. The Company currently does not charge a fee for
the use of customer support. The costs associated with these services are
insignificant in relation to product value.
Substantially all of the Company's licensing fees have been derived from
the sale of products to individual investors. TRADESTATION, OPTIONSTATION and
SUPERCHARTS are sold primarily by the Company's telesales force. To date, a
majority of the licensing fees have been generated through sales of
TRADESTATION. For sales of most of the Company's products, customers typically
provide the Company with a credit card number and are billed for the product
automatically and on a monthly basis over the course of 12 months. The Company's
WALL STREET ANALYST product, which does not represent a material portion of the
Company's revenues, is sold through the retail channel by distributors and to a
lesser extent through third-party mail order catalogs.
The majority of the Company's other revenues for the year ended December
31, 1997 were derived from royalties associated with a licensing agreement with
Dow Jones Markets relating to TRADESTATION. Under existing agreements with Dow
Jones Markets, Dow Jones Markets has the right to sell TRADESTATION and
SUPERCHARTS to its customers. Dow Jones Markets pays a per unit royalty to the
Company, subject to a minimum annual royalty commitment with respect to
TRADESTATION sales. As of late March 1998, marketing of SUPERCHARTS by Dow Jones
Markets had not commenced. The majority of the remaining other revenues is
comprised of fees and commissions paid to the Company pursuant to
cross-marketing agreements with data service vendors. Other revenues are
recognized as earned in accordance with the terms of the applicable contract.
The Company provides customers with a 30-day right of return and, as a
result, records a provision for estimated returns at the time of sale. Depending
on the circumstances, the Company often allows customers to return products
after the 30-day period. The reserve for returns and the provision for bad
debts, in accordance with generally accepted accounting principles, are
estimated based on historical experience and other relevant factors and there is
no certainty that future returns or bad debts will not exceed established
estimates. As a result of recently expanded marketing and sales efforts,
including television advertising, the Company has reached a broader audience
which
17
<PAGE>
includes more individuals who are not necessarily suited to use the Company's
products. Consequently, the Company's rate of returns and provision for bad
debts have increased over the last year. There can be no assurance that this
trend will not continue.
Approximately 9.3% of the Company's revenues for the year ended December
31, 1997 were derived from customers outside of the United States and Canada.
The Company markets its products outside the United States and Canada primarily
through independent resellers and, to a lesser extent, through its U.S.-based
telesales force in response to inbound inquiries from international customers.
The Company intends to focus increased resources on international sales efforts
and therefore believes that international revenues will increase as a percentage
of total revenues in the future. See "Business - Sales and Marketing."
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, ACCOUNTING FOR THE COST OF CAPITALIZED SOFTWARE TO BE SOLD, LEASED OR
OTHERWISE MARKETED, the Company examines its software development costs after
technological feasibility has been established to determine the amount of
capitalization that is required. Based on the Company's product development
process, technological feasibility is established upon completion of a working
model. The costs that are capitalized are amortized on the straight-line basis
over a one-year period, the period of benefit of the related products. There
were no capitalized software development costs as of December 31, 1997.
Capitalized software development costs, net of amortization, were $71,000 and
$61,000 at December 31, 1996 and 1995, respectively. In the future, the Company
believes that the time between the technological feasibility of the Company's
products and the general release of such software will be insignificant, and, as
a result, software development costs qualifying for capitalization are expected
to be immaterial.
In 1988, the Company elected to be taxed under Subchapter S of the Code,
and, as a result, the Company's earnings prior to September 30, 1997 (the
effective date of the Initial Public Offering) were taxed at the federal level
directly to the Company's shareholders (the State of Florida does not have a
personal income tax). Effective September 30, 1997, the Company terminated its S
corporation election and became subject to corporate-level federal and state
income taxes. As a result of terminating this election, the Company was required
to record a non-recurring credit (the "SFAS No. 109 Credit"). The SFAS No. 109
Credit represents the recognition of net deferred tax assets arising from the
book and tax basis differences that arise primarily as a result of accounts
receivable reserves. The SFAS No. 109 Credit, net of the provision for taxes
payable described below, was approximately $1.2 million as of September 30,
1997, the date the S corporation election was terminated.
Since its inception, the Company had used for determining taxable income
the cash method of accounting rather than the accrual method of accounting. In
July 1997, the Company voluntarily filed with the Internal Revenue Service (the
"IRS") a Form 3115 to change to the accrual method and to report income that
would have been reported had the accrual method been used. The effect of the
change in method of accounting for tax purposes permitted by the filing of Form
3115 is that the Company will have additional taxable income in 1997 and 1998
aggregating approximately $4.6 million, resulting in additional federal and
state income tax of approximately $1.8 million. Approximately $900,000 of such
taxes payable was paid by the Company in 1997.
Shortly after, though not as a result of, the filing of the Form 3115, the
Company received a notice that the IRS intended to perform an examination of the
Company's 1995 tax year. The IRS agents have concluded their fieldwork and the
Company anticipates that the issuance of its final
18
<PAGE>
report, which is expected in the near future, will not have a material effect on
the Company's financial position or results of operations.
The pro forma income tax adjustments in the Company's historical financial
statements reflect the federal and state income taxes which would have been
recorded if the Company had been treated as a C corporation during the periods
presented. The Company has calculated these amounts based upon an estimated
combined effective tax rate of 39.5% for the periods prior to September 30,
1997. In addition, the non-recurring net tax credit of $1.2 million has been
excluded from pro forma net income.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in
the Company's statement of income reflected as a percentage of total revenues
and as a percentage of licensing fees:
<TABLE>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
<S> <C> <C> <C>
Licensing fees................................ 83.4% 78.2% 84.0%
Other revenues................................ 16.6 21.8 16.0
------ ------ ------
Total revenues.......................... 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Cost of licensing fees........................ 6.3 9.6 9.3
Product development........................... 6.5 5.9 6.9
Sales and marketing........................... 38.6 31.5 37.8
General and administrative.................... 18.5 13.6 11.0
----- ----- -----
Total operating expenses................ 69.9 60.6 65.0
----- ----- -----
Income from operations............................. 30.1% 39.4% 35.0%
===== ===== =====
AS A PERCENTAGE OF LICENSING FEES:
Operating expenses:
Cost of licensing fees........................ 7.6% 12.3% 11.1%
Product development........................... 7.8 7.5 8.2
Sales and marketing........................... 46.3 40.2 45.0
General and administrative.................... 22.2 17.4 13.1
----- ----- -----
Total operating expenses................ 83.9% 77.4% 77.4%
===== ===== =====
</TABLE>
19
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YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
TOTAL REVENUES. The Company's total revenues increased 64% from $17.8
million in 1996 to $29.2 million in 1997.
LICENSING FEES. Licensing fees increased 75% from $13.9 million in 1996
to $24.4 million in 1997, primarily due to an increase in TRADESTATION sales
(related to increased net unit shipments and, to a lesser extent, a 5% increase
in list price in January 1997) and, to a lesser extent, the introduction of
OPTIONSTATION in September 1996. The Company believes that the increased net
unit shipments of TRADESTATION were due to new marketing efforts, an emphasis on
providing customers with the ability to pay for products monthly over a 12-month
period and growth in the Company's sales and marketing organization. The Company
increased its reserves for returns during 1997 to provide for the impact that
its new marketing efforts have had and are expected to continue to have on
returns.
During the fourth quarter of 1997, the Company experienced slower than
anticipated demand for its products, which led to lower than anticipated fourth
quarter licensing fees revenues. Management believes that the slower demand was
due in part to customer delays in decision making (in anticipation of the
release of the next versions of TRADESTATION and OPTIONSTATION expected during
the second quarter of 1998 and the release of the next version of SUPERCHARTS
expected in the third quarter of 1998), as well as greater than expected lost
sales as a result of December's curtailed business days. Management also
believes that licensing fees revenues will continue to be in line with the level
of revenues experienced during the fourth quarter of 1997 until the next
versions of such products are released.
OTHER REVENUES. Other revenues increased 25% from $3.9 million in 1996
to $4.9 million in 1997, primarily due to an increase in minimum royalties under
the Company's license agreement with Dow Jones Markets and, to a lesser extent,
increased cross-marketing commissions from data vendors which resulted from an
increase in licensing fees.
OPERATING EXPENSES
COST OF LICENSING FEES. Cost of licensing fees consists primarily of
product media, packaging and storage and inventory costs. Cost of licensing fees
increased from $1.7 million in 1996 to $1.8 million in 1997. Cost of licensing
fees as a percentage of licensing fees improved from 12% in 1996 to 8% in 1997,
primarily due to increased unit sales of higher-priced products as a percentage
of total unit sales.
PRODUCT DEVELOPMENT. Product development expenses include expenses
associated with the development of new products, enhancements to existing
products, testing of products and the creation of training manuals, and consist
primarily of salaries, other personnel costs and depreciation of computer and
related equipment. Product development expenses increased from $1.0 million in
1996 to $1.9 million in 1997, primarily due to an increase in the number of
individuals employed in product development. Product development expenses as a
percentage of licensing fees did not change significantly in 1997 as compared to
1996. The Company believes that a significant level of product development
expenditures will be required to remain competitive, particularly as it enters
the institutional investor market. Accordingly, the Company anticipates that
product development
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expense, both in dollar amount and as a percentage of license fees, will
increase for the foreseeable future.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
marketing programs, including advertising, brochures, direct mail programs and
seminars to promote the Company's products to investors, as well as commissions,
salaries for the customer support center and marketing personnel, other
personnel costs and shipping expenses. Sales and marketing expenses increased
from $5.6 million in 1996 to $11.3 million in 1997, primarily due to increases
in advertising (including print advertising, the use of sales seminars,
television advertising and direct mailers) of $3.7 million, commissions and
personnel costs for the customer support center of $1.4 million, telephone
expenses of $298,000 and shipping costs of $110,000. Sales and marketing
expenses as a percentage of licensing fees increased from 40% in 1996 to 46% in
1997. The Company expects to continue hiring additional personnel and promote
new product upgrade releases and anticipates that the dollar amount of sales and
marketing expenses will increase at least through the end of 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee related costs for administrative personnel such as
executive, human resources, finance and information systems employees, as well
as external professional fees, rent and other facilities expense and provision
for bad debts. General and administrative expenses increased from $2.4 million
in 1996 to $5.4 million in 1997, primarily due to increases in the provision for
bad debts associated with increased revenues and reaching a broader audience of
customers, increases in personnel, professional fees and other related expenses
required to manage the growth of the Company, and rent related to the Company's
new corporate headquarters. General and administrative expenses as a percentage
of licensing fees increased from 17% in 1996 to 22% in 1997. The Company
believes that the dollar amount of its general and administrative expenses will
increase as the Company incurs additional costs (including directors' and
officers' liability insurance, investor relations costs and increased
professional fees) related to being a public company and provides for estimated
expenses related to the defense of the class action lawsuit against the Company.
See "Legal Proceedings."
OTHER INCOME, NET
Other income, net consists primarily of investment income from cash and
cash equivalents. The Company generally invests in overnight investments, tax
exempt commercial paper and investment grade short-term municipal bonds. The
amount of interest income fluctuates based on the amount of funds available for
investment and the prevailing interest rates. Other income, net increased 146%
from $60,000 in 1996 to $146,000 in 1997, primarily due to increased income
earned on the proceeds from the Company's Initial Public Offering.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES
TOTAL REVENUES. The Company's total revenues increased 89% from $9.4
million in 1995 to $17.8 million in 1996.
LICENSING FEES. Licensing fees increased 76% from $7.9 million in 1995
to $13.9 million in 1996, primarily due to an increase in TRADESTATION sales
(related to an approximate 51% increase
21
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in net unit shipments and, to a lesser extent, a 20% increase in list price in
March 1996) and, to a lesser extent, increased sales of SUPERCHARTS and add-on
products and the introduction of OPTIONSTATION in September 1996. The Company
believes that the increased net unit shipments of TRADESTATION were due to the
release of version 4.0 and increased marketing efforts.
OTHER REVENUES. Other revenues increased 158% from $1.5 million in 1995
to $3.9 million in 1996, primarily due to the commencement of royalties under
the Company's license agreement with Dow Jones Markets and, to a lesser extent,
increased cross-marketing commissions from data vendors which resulted from an
increase in licensing fees.
OPERATING EXPENSES
COST OF LICENSING FEES. Cost of licensing fees increased from $876,000
in 1995 to $1.7 million in 1996, primarily due to increased product unit
shipments. Cost of licensing fees as a percentage of licensing fees increased
slightly from 11% in 1995 to 12% in 1996 due to a shift in product mix.
PRODUCT DEVELOPMENT. Product development expenses increased from
$652,000 in 1995 to $1.0 million in 1996, primarily due to an increase in the
number of individuals employed in product development. Product development
expenses represented 8% and 7% of licensing fees in each of 1995 and 1996,
respectively.
SALES AND MARKETING. Sales and marketing expenses increased from $3.6
million in 1995 to $5.6 million in 1996, primarily due to increased personnel
costs and commissions of $1.4 million, shipping costs of $413,000, travel and
trade convention expenses of $162,000 and telephone expenses of $66,000. Sales
and marketing expenses as a percentage of licensing fees decreased from 45% in
1995 to 40% in 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased from $1.0 million in 1995 to $2.4 million in 1996, primarily due to
increases in the provision for bad debts associated with increased revenues, in
personnel and related expenses to manage the growth of the Company, in insurance
expense and incremental expenses related to the move by the Company to a new
corporate headquarters. General and administrative expenses as a percentage of
licensing fees increased from 13% in 1995 to 17% in 1996.
OTHER INCOME, NET
Other income, net increased 151% from $24,000 in 1995 to $60,000 in
1996, primarily due to increased interest income earned on cash balances.
INCOME TAXES
For income tax purposes, the Company was an S corporation prior to
September 30, 1997. Accordingly, net income and related timing differences which
arose in the recording of income and expense items for financial reporting and
tax reporting purposes were included in the individual tax returns of the S
corporation shareholders. Effective September 30, 1997, the Company terminated
its S corporation election, and, as a result, adopted SFAS No. 109, ACCOUNTING
FOR INCOME TAXES. SFAS No. 109 requires that deferred income tax balances be
recognized based on the differences
22
<PAGE>
between the financial statement and income tax bases of assets and liabilities
using the enacted tax rates.
Upon adoption of SFAS No. 109 during the third quarter, the Company
recorded a benefit for income taxes which reflects the SFAS No. 109 Credit, a
non-recurring deferred income tax credit of approximately $3.0 million partially
offset by a $1.8 million provision for income taxes payable. The SFAS No. 109
Credit recognized net deferred tax assets arising from book and tax basis
differences that arose primarily as a result of accounts receivable reserves.
The $1.8 million in income taxes payable relate to federal and state income
taxes owed by the Company as a result of an approximate $4.6 million in S
corporation taxable earnings to be recognized for tax purposes during 1997 and
1998. Approximately $900,000 of such taxes payable was paid by the Company in
1997.
The pro forma income tax adjustments in the Company's historical
financial statements reflect the federal and state income taxes which would have
been recorded if the Company had been treated as a C corporation during the
periods presented. The Company has calculated these amounts based upon an
estimated combined effective tax rate of 39.5% for 1995, 1996 and the first nine
months of 1997. The effective tax rate during the fourth quarter of 1997 was
33.4% and is slightly below the 38.6% statutory rate as a result of the impact
of tax-free investment income.
VARIABILITY OF RESULTS
The operating results for any quarter are not necessarily indicative of
results for any future period or for the full year. The Company's quarterly
revenues and operating results have varied in the past and are likely to vary
from quarter to quarter in the future. Such fluctuations may result in
volatility in the price of the Common Stock. As budgeted expenses are based upon
expected revenues, if actual revenues on a quarterly basis are below
management's expectations, then results of operations are likely to be adversely
affected because a relatively small amount of the Company's expenses varies with
its revenues in the short term. In addition, operating results may fluctuate
based upon the timing of releases of new products and/or enhancements, increased
competition, variations in the mix of sales, and announcements of new products
and/or enhancements by the Company or its competitors and other factors. Such
fluctuations may result in volatility in the price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward-Looking Statements; Business Risks."
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Initial Public Offering, the Company funded operations and
financed growth and capital expenditures through cash provided by operations.
During the fourth quarter of 1997, the Company and certain selling shareholders
completed the Initial Public Offering of the Company's Common Stock at an
offering price of $11.00 per share. Of the 3,925,000 shares of Common Stock
sold, 2,758,108 shares were sold by the Company. Total proceeds to the Company,
net of underwriting discounts and offering expenses of approximately $2.9
million, were $27.4 million.
Immediately prior to the Initial Public Offering, the Company
terminated its S corporation status and the Company became a C corporation
making it subject to federal and state income taxes on its earnings. In
conjunction with the Company becoming a C corporation, the Company paid in cash
the Dividend to the Company's then existing shareholders of approximately $15.4
million for S corporation earnings previously undistributed. The Dividend was
equal to the Company's estimate
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<PAGE>
at that time of its cumulative taxable income prior to its conversion to a C
corporation to the extent such taxable income had not been previously
distributed. Subsequent to the payment of the Dividend, the Company
preliminarily determined that the actual cumulative taxable income would be less
than was originally estimated. Accordingly, in the fourth quarter of 1997 the
recipients of the Dividend repaid $800,000, plus interest, to the Company,
reducing the Dividend to $14.6 million. It is expected that the amount of the
Dividend will be adjusted further during 1998 based upon the finalization of the
Company's 1997 tax returns and the final determination of S corporation earnings
at the date of conversion to a C corporation.
Cash provided by operating activities totaled $3.2 million, $5.6
million and $2.4 million in 1997, 1996 and 1995, respectively. The decrease in
net cash provided by operations in 1997 was primarily attributable to an
increase in the growth of accounts receivable balances during 1997. The increase
in net cash provided by operations in 1996 was primarily attributable to
increased net income of the Company. Cash provided by operating activities was
reduced by increases in receivables of $7.5 million, $3.2 million and $1.2
million in 1997, 1996 and 1995, respectively. Accounts receivable increased as a
result of increased sales generated by expanded marketing and sales efforts.
Although the Company has, since 1992, granted its customers extended payment
terms, in 1996 they were extended from 10 to 12 months.
The Company's investing activities used cash of $1.9 million, $541,000
and $101,000 in 1997, 1996 and 1995, respectively. The principal use of cash in
investing activities in 1997 was for the purchase of marketable securities of
approximately $1.0 million. The balance of such investing activities during
1997, 1996 and 1995 was primarily for capital expenditures related to the
acquisition of computer and related equipment and software required to support
expansion of the Company's operations. Capital expenditures in 1997 also include
purchases of furniture and fixtures and leasehold improvements related to the
Company's move to a new corporate headquarters in February 1997.
The Company's financing activities provided cash of $10.9 million in
1997 and used cash of $5.2 million and $2.2 million in 1996 and 1995,
respectively. Cash provided during 1997 was primarily due to $27.4 million of
net proceeds from the Company's Initial Public Offering completed during the
fourth quarter of 1997 offset by cash distributions totaling $16.5 million to
the Company's S corporation shareholders prior to the Initial Public Offering. A
portion of the distributions were financed with a $15 million short-term bank
loan which was repaid with the proceeds of the Initial Public Offering. The
balance of the net proceeds from the Initial Public Offering have been
temporarily invested in tax-exempt commercial paper and short-term municipal
bonds pending the use by the Company of such proceeds for working capital and
other general purposes. Cash used for financing activities during 1996 and 1995
was primarily for distributions to the Company's shareholders.
As of December 31, 1997, the Company had cash and cash equivalents of
approximately $12.3 million and working capital of approximately $24.2 million.
Assuming there is no significant change in the Company's business, the Company
believes that existing cash balances, including proceeds received from the
Initial Public Offering, and cash flow from operations will be sufficient to
meet its normal working capital and capital expenditure requirements for at
least the next 12 months. The Company expects to incur significant capital
expenditures in 1998 in order to upgrade its telephone systems and complete the
implementation of its new customer tracking and management and accounting
systems.
24
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 128, EARNINGS PER SHARE which changes the method of calculating
earnings per share. SFAS No. 128 requires a dual presentation of basic and
diluted earnings per share on the face of the income statement. Basic earnings
per share is computed by dividing the net income available to common
shareholders by the weighted average shares of outstanding common stock. The
calculation of diluted earnings per share is similar to basic earnings per share
except that the denominator includes dilutive common stock equivalents such as
stock options and warrants. SFAS No. 128 is effective for financial statements
for periods ending after December 15, 1997 and was adopted by the Company in the
fourth quarter of 1997.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP 97-2, SOFTWARE
REVENUE RECOGNITION. SOP 97-2 supersedes SOP 91-1. SOP 97-2 requires companies
to defer revenue and profit recognition if four required criteria of a sale are
not met. In addition, SOP 97-2 requires that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation, or training. SOP
97-2 is effective for all transactions entered into in fiscal years beginning
after December 15, 1997 and has been adopted by the Company effective January 1,
1998. Management does not believe that the adoption of SOP 97-2 will have a
material effect on the Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION.
SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components which will be presented in association
with a company's financial statements. Comprehensive income is defined as the
change in a business enterprise's equity during a period arising from
transactions, events or circumstances relating to non-owner sources, such as
foreign currency translation adjustments and unrealized gains or losses on
available-for-sale securities. It includes all changes in equity during a period
except those resulting from investments by or distributions to owners. SFAS No.
130 is effective as of March 31, 1998.
SFAS No. 131 establishes standards for the way that public companies
report selected information about operating segments in annual and interim
financial reports to shareholders. It also establishes standards for related
disclosures about an enterprise's business segments, products, services,
geographic areas and major customers. SFAS No. 131, which supersedes SFAS No.
14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE, but retains the
requirement to report information about major customers and requires that a
public company report financial and descriptive information about its reportable
operating segments. Generally, financial information is required to be reported
on the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. SFAS No. 131 requires that a
public company report a measure of segment profit or loss, certain specific
revenue and expense items and segment assets. SFAS No. 131 is effective as of
December 31, 1998.
25
<PAGE>
YEAR 2000 COMPLIANCE
The Company is in the process of implementing a new customer integrated
support and general ledger system which is expected to be in place within the
next year and which will comply with year 2000 requirements. Because the
Company's current systems are in the process of being replaced, the Company
determined that it was unnecessary to evaluate the Company's current systems'
compliance with year 2000 requirements. Although the Company has not undertaken
an evaluation of year 2000 compliance issues with respect to its vendors, the
Company does not believe that it will encounter significant difficulties with
respect to year 2000 compliance issues that its major vendors may experience
because the products that the Company obtains from its major vendors are
generally not year 2000 date sensitive. Nevertheless, to the extent the
Company's vendors experience year 2000 difficulties with their internal billing
and shipping systems, the Company may face delays in obtaining certain products
and services. The Company does not expect that its vendors' year 2000
difficulties, to the extent they exist, will have a significant effect on the
Company's business or operations. See "Business - Product Development and Year
2000 Compliance" for a discussion of year 2000 implications with respect to the
Company's products.
FORWARD-LOOKING STATEMENTS; BUSINESS RISKS
This report contains statements that are forward-looking within the
meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. When used in this report, the words "believes," "estimates,"
"plans," "expects," "intends," "anticipates," "may," "prospect" and similar
expressions as they relate to the Company or its management are intended to
identify the forward-looking statements. These statements are based on current
expectations and beliefs concerning future events that are subject to risks and
uncertainties. Actual results may differ materially from the results suggested
herein and from the results historically experienced. Factors that may cause or
contribute to such differences and impact future events include, but are not
limited to, the items described below, as well as in other sections of this
report and the risk factors contained in the Company's Prospectus dated
September 30, 1997 relating to its Initial Public Offering, any of which could
have a material adverse effect on the results of operations and financial
condition of the Company:
/bullet/ PRODUCT UPGRADES. The Company expects to introduce the next versions of
its premium products, TRADESTATION AND OPTIONSTATION, late in the
second quarter of 1998 and of SUPERCHARTS in the third quarter of 1998.
These new versions will permit the products to take advantage of the
enhanced capabilities of a 32-bit Windows environment. In the dynamic
marketplace for PC-based financial software, the timely introduction of
new products and new versions of existing products is an important
factor in a company's success. If the Company should experience delays
in the introduction of its next versions of TRADESTATION, OPTIONSTATION
and SUPERCHARTS or in the introduction of new products, or if customer
acceptance for such new versions or new products does not meet the
Company's expectations, its financial condition and prospects for
growth could be negatively affected. Similarly, should competing
products enter the marketplace before or near to the time the Company's
new products and/or new versions of its existing products have gained
customer acceptance, or should the Company fail to market effectively
its new products and new versions, or should the Company be unable to
develop and introduce timely and successfully new products and new
versions of its existing products, the Company's business and prospects
could be materially adversely affected. In addition, when new versions
of existing products are announced or potential customers otherwise
learn of the imminence of new version releases, customers may delay
their purchases until the new versions are released, negatively
affecting sales.
The 32-bit versions of
26
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TRADESTATION, OPTIONSTATION and SUPERCHARTS will not be compatible with
the Microsoft Windows 3.1 operating system and will require Windows 95,
Windows NT 4.0 or later versions of Windows. A decision by current
users of the Windows 3.1 operating system not to upgrade to a newer
version of the Windows operating system would adversely affect demand
for the Company's products. In addition, the 32-bit versions of
TRADESTATION, OPTIONSTATION and SUPERCHARTS will have higher minimum
and recommended hardware requirements than do the current 16-bit
versions of such products. To the extent existing users of the
Company's 16-bit products decide not to upgrade their hardware, and to
the extent that prospective customers do not own the appropriate
hardware and are unwilling to acquire it, such users or prospective
customers will not upgrade to, or purchase, the Company's 32-bit
versions of its products, which could have a material adverse effect on
the Company's revenues. See "Business - Product Development and Year
2000 Compliance."
/bullet/ POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
quarterly revenues and operating results have fluctuated significantly
in the past, including the fourth quarter of 1997 (when compared to the
other quarters of that year), and will likely fluctuate in the future.
Causes of such significant fluctuations may include, but are not
limited to, the following factors: the ability of the Company to
develop, introduce, market and ship high-quality new and enhanced
versions of the Company's products such as the anticipated new versions
of TRADESTATION, OPTIONSTATION and SUPERCHARTS on a timely basis; the
number, timing and significance of new product introductions by the
Company and its competitors; the level of product and price
competition; changes in the Company's sales incentive or marketing
strategy; demand for the Company's products; changes in operating
expenses; the volume and the timing of orders; attempts by the Company
to enter new markets or expand into related businesses and the cost,
timing and success thereof, the incurrence of significant costs in one
quarter related to revenues anticipated to be realized in a subsequent
quarter; and general economic factors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Variability
of Results."
/bullet/ DEPENDENCE ON KEY EMPLOYEES. The Company's success depends to a very
significant extent on the continued availability and performance of a
number of senior management, engineering and sales and marketing
personnel, including the founders of the Company and its Co-Chief
Executive Officers, William R. Cruz and Ralph L. Cruz and the Company's
Vice President of Product Development, Peter A. Parandjuk. See
"Business - Employees."
/bullet/ COMPETITION. The market for investment analysis software is intensely
competitive and rapidly changing. The Company believes that due to
anticipated growth of the market for investment analysis software, and
other factors, competition will substantially increase and intensify in
the future. The Company believes its ability to compete will depend
upon many factors both within and outside its control, including the
timing and market acceptance of new products and enhancements developed
by the Company and its competitors, product functionality, data
availability, ease of use, pricing, reliability, customer service and
support, sales and marketing efforts and product distribution channels.
See "Business - Product Development and Year 2000 Compliance" and
"Business - Competition."
/bullet/ PRODUCT CONCENTRATION. Since its introduction in 1991, sales of
TRADESTATION have accounted for a majority of the Company's total
revenues and are expected to continue to account for a substantial
portion of such revenues for the foreseeable future. As a result, any
factor resulting in price reductions of, or declines in demand for,
TRADESTATION would have a
27
<PAGE>
material adverse effect on the Company's business, financial condition
and results of operations. Similarly, customer acceptance of the
next version of TRADESTATION which the Company expects to introduce
late in the second quarter of 1998 is expected to affect the Company's
results of operations beginning in the second half of 1998. See
"Business - Product Development and Year 2000 Compliance" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Years Ended December 31, 1997 and 1996 -
REVENUES - LICENSING FEES."
/bullet/ MANAGEMENT OF CHANGE. The Company's business has grown rapidly in
recent years. This growth has placed, and will continue to place, a
significant strain on the Company's management and operations. The
Company has ambitious plans for future growth, including entry into new
markets and strategic relationships, that will place additional
significant strain on the Company's management and operations. The
Company's future operating results will depend, in part, on its ability
to continue to broaden the Company's senior management group and
administrative infrastructure, and its ability to attract, hire and
retain skilled employees, particularly in the product management and
product development areas. See "Business - Employees."
/bullet/ RISK OF RETURNS. Revenues are recognized by the Company at the time the
product is shipped, and the Company maintains a reserve to account for
anticipated returns of its products based on the Company's evaluation
of historical experience and other relevant information. The Company's
product return rate has increased significantly over the last several
quarters and there can be no assurance that this trend will not
continue. In 1997, the Company increased its returns reserve in
response to the increased return rate. In the event that returns
materially increase over historical rates as a result of changes in
technology or marketing strategy, shifts in consumer demand or other
reasons, the reserves maintained by the Company will not be sufficient
to cover such returns and, in such event, the Company's business,
financial condition and results of operations may be materially
adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Years Ended December 31, 1997 and 1996 -
REVENUES - LICENSING FEES."
/bullet/ ACCOUNTS RECEIVABLE. The Company has an unusually high level of
accounts receivable, based primarily on its policy of permitting
customers to pay for many of its products by automatic monthly charges
to the customer's credit card over a 12-month period. While the Company
believes that it maintains adequate reserves to account for the
non-collection of its accounts receivable, there can be no assurance
that the rate of non-collection of accounts receivable will not
continue to exceed historical levels, as was the case during 1997. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview."
/bullet/ RISKS ASSOCIATED WITH ENTRY INTO INSTITUTIONAL MARKET. The Company has
historically sold its products to individuals and has limited
experience in marketing its products directly to institutions. The
Company believes its future success will depend in part on its ability
to move beyond its traditional customer base and market its products to
institutions, including brokerage firms. The Company's success in the
institutional market will depend in part, upon its ability to
successfully develop network versions of its products such as the
32-bit
28
<PAGE>
versions of TRADESTATION, OPTIONSTATION and SUPERCHARTS. See "Business
- Sales and Marketing."
/bullet/ RISKS ASSOCIATED WITH FLUCTUATIONS IN THE SECURITIES AND FINANCIAL
MARKETS. The Company's products are marketed to customers who invest or
trade in the securities and financial markets. To the extent that
interest in investing, trading or the use of investment analysis tools
decreases due to volatility in the securities or financial markets, tax
law changes, recession, depression, or otherwise, the Company's
business, financial condition and results of operations could be
materially adversely affected.
/bullet/ RELATIONSHIPS WITH DATA VENDORS. The Company's viability depends on the
ability of its customers to obtain access to a breadth of quality
real-time and historical financial market data from services that are
technically compatible with the Company's products. The Company
currently depends nearly entirely upon relationships with third-party
data vendors to ensure such access, and it currently has
cross-marketing agreements with several data vendors. Most of the data
vendors with whom the Company has developed technical compatibility
(including those with which it has cross-marketing agreements) have
developed and are currently marketing their own versions of investment
analysis software and, in some cases, have established alliances with
the Company's competitors. Such data vendors may decide to increase the
focus of their efforts and resources on their own development efforts,
develop products highly competitive with the Company's products,
strengthen their alliances with the Company's competitors, discontinue
their relationships with the Company, or develop strategic initiatives
which involve eliminating or limiting compatibility between the
Company's products and the data vendors' services. See "Business -
Strategic Relationships."
/bullet/ RISKS ASSOCIATED WITH FUTURE RELIANCE ON THE INTERNET. The Company
believes that future sales of its products and the future growth of the
Company will depend upon the adoption of the Internet as a widely used
medium for commerce and communication, and the Internet becoming a
significant means of delivery of high-quality financial market data,
marketing materials and customer support. If the Internet becomes
viable in such manner, the Company will have to develop extensive
Internet product technical compatibility and adjust its marketing and
customer support approaches accordingly. There can be no assurance that
the Company will successfully develop and implement such technical
compatibility, or effectively adjust its marketing and customer support
approaches, in a timely manner, if at all. Conversely, the Internet may
not prove to be a viable commercial marketplace because of a failure to
develop the necessary infrastructure, such as reliable network
backbones and adequate band-widths, or the failure to develop
complementary services, such as high-speed modems. The Internet has
experienced, and is expected to continue to experience, significant
growth in the number of users and amount of traffic. There can be no
assurance that the Internet infrastructure will continue to be able to
support the demands placed on it by this continued growth.
/bullet/ DEPENDENCE ON RELATIONSHIP WITH DOW JONES MARKETS. The Company has
entered into two Software License, Maintenance and Development
Agreements with Dow Jones Markets relating to TRADESTATION and
SUPERCHARTS. The TRADESTATION agreement provides a substantial minimum
royalty stream over the next five years. While the agreements are
non-cancelable, there can be no assurance that the Company's
anticipated royalties and other anticipated benefits from its relations
with Dow Jones Markets will be realized. Further, in
29
<PAGE>
late March 1998 it was announced that Dow Jones Markets is to be sold
to Bridge Information Systems. There can be no assurance that such
sale, if consummated, would not have a material adverse effect on the
transactions contemplated by the Dow Jones Markets agreements. See
"Business - Strategic Relationships."
/bullet/ INTELLECTUAL PROPERTY. The Company's success is heavily dependent on
its proprietary technology. The Company relies on a combination of
copyright, trade secret and trademark laws, nondisclosure agreements
and other contractual provisions and technical measures to protect its
proprietary rights. Policing unauthorized use of the Company's products
is difficult, however, and the Company is unable to determine the
extent to which piracy of its software products exists. There can be no
assurance that the steps taken by the Company to protect its
proprietary rights will be adequate or that the Company's competitors
will not independently develop technologies that are substantially
equivalent or superior to the Company's technologies or products. One
technical measure that the Company employs to protect its software from
piracy is the use of a hardware security block. The Company is
currently considering, based on customer feedback, eliminating the
security block and/or pursuing alternate technical measures. If that
occurs, there can be no assurance that piracy will not materially
increase and result in reduced revenues to the Company. See "Business -
Intellectual Property."
/bullet/ RISKS OF PRODUCT DEFECTS; PRODUCT LIABILITY. As a result of their
complexity, all software products, including the Company's products,
contain errors. Despite testing by the Company and initial use by
customers, when new products are introduced or new versions of products
are released there can be no assurance that errors will not be found
and persist after commencement of commercial shipments, resulting in
loss of revenues, delay in market acceptance or damage to the Company's
reputation.
/bullet/ POTENTIAL LIABILITY TO CUSTOMERS. The Company's products are used by
investors in the financial markets, and, as a result, an investor might
claim that investment losses or lost profits resulted from use of a
flawed version of one of the Company's products or inaccurate
assumptions made by the product regarding data, which could result in
litigation against the Company. In addition, there can be no assurance
that unanticipated difficulties will not delay the Company's year 2000
compliance efforts, or that compliance modifications will not adversely
affect the Company's products in ways not currently anticipated by the
Company, either of which occurrences could result in claims by
customers. See "Product Development and Year 2000 Compliance." Any such
litigation could result in substantial damages and significant cost to
the Company in terms of the deployment of its financial and managerial
resources.
/bullet/ RISK OF PENDING CLASS ACTION. On January 28, 1998, a class action
lawsuit was filed against the Company, its Co-Chief Executive Officers
and the lead underwriters for the Company's Initial Public Offering
alleging that the defendants violated Section 11 of the Securities Act
by allegedly making misrepresentations and omissions of material facts
in connection with the Initial Public Offering of the Company's Common
Stock and in connection with the Company's financial condition. The
alleged misrepresentations and omissions concern, among other things,
the receipt of proceeds of the Initial Public Offering by William R.
Cruz and Ralph L. Cruz and the Company's TRADESTATION sales. The suit
also alleges that William R. Cruz and Ralph L. Cruz violated Section
15 of the Securities Act based on the same alleged conduct as described
above. The plaintiff seeks certification of a class consisting of
30
<PAGE>
all persons who purchased the Company's Common Stock in the Initial
Public Offering or between October 4, 1997 and January 6, 1998
(excluding, in general, persons who are related to or have interests in
common with the defendants). On behalf of himself and the class, the
plaintiff seeks damages, interest, costs and expenses, including
attorneys' and experts' fees and other appropriate relief. While the
Company believes the lawsuit is without merit and intends to contest
the lawsuit vigorously, the costs of litigation are expected to
negatively affect the Company's general and administrative expenses. In
addition, as the lawsuit proceeds, management time and attention may be
diverted as the Company responds to the allegations raised therein. In
the event the Company does not ultimately prevail in the lawsuit, class
damages could be substantial and could materially adversely affect the
Company's financial condition. See "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Years Ended December 31, 1997 and 1996 -
OPERATING EXPENSES - GENERAL AND ADMINISTRATIVE EXPENSES."
/bullet/ RISK OF INTELLECTUAL PROPERTY LITIGATION. There has been substantial
litigation in the software industry involving intellectual property
rights. Although the Company does not believe that it is infringing the
intellectual property rights of others, there can be no assurance that
infringement claims, if asserted, would not have a material adverse
effect on the Company's business, financial condition and results of
operations, or result in the Company being unable to use intellectual
property which is integral to one or more of its products. See
"Business - Intellectual Property."
/bullet/ RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION. A key component of the
Company's strategy is its planned expansion into international markets.
This strategy is dependent, in part, on international customers having
access to the appropriate financial market data. There is no practical
and affordable access to such data in many countries and there can be
no assurance that the required financial market data will ever be
readily available in the countries in which the Company's products
could be sold or that such data, if available, will be reliable or
affordable. To date, the Company has only limited experience in
marketing, selling and delivering its products internationally. See
"Business - Sales and Marketing."
/bullet/ FUTURE CAPITAL NEEDS. The Company believes that it has sufficient funds
to meet normal working capital needs at least through 1998. The
Company's ability to expand and grow its business in accordance with
its current plans, to make acquisitions and to meet its long-term
capital requirements beyond 1998 will depend on many factors,
including, but not limited to, the rate, if any, at which the Company's
cash flow increases, the ability and willingness of the Company to
accomplish acquisitions with its capital stock, and the availability to
the Company of public and private debt and equity financing. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and notes thereto and the report of the
independent auditors thereon set forth on pages F-1 through F-17 herein are
filed as part of this report and incorporated herein by reference.
The Financial Statement Schedule and the report of the independent
auditors thereon set forth on pages S-1 through S-3 herein are filed as part of
this report and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from the Company's 1998 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the Company's 1998 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the Company's 1998 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from the Company's 1998 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The Financial Statements and
notes thereto and the report of the independent
auditors thereon set forth on pages F-1 through F-17
herein are filed as part of this report and
incorporated herein by reference.
2. Financial Statement Schedules. The Financial
Statement Schedule and the report of the independent
auditors thereon set forth on pages S-1 through S-3
herein are filed as part of this report and
incorporated herein by reference.
3. Exhibits.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Second Amended and Restated Articles of
Incorporation of Omega Research,
Inc./dagger/
3.2 Second Amended and Restated Bylaws of Omega
Research, Inc./dagger/
10.1 Omega Research, Inc. Amended and Restated
1996 Incentive Stock Plan./bullet/*
10.2 Omega Research, Inc. 1997 Nonemployee
Director Stock Option Plan, as amended
(filed herewith).
10.3 Software License, Maintenance and
Development Agreement between Dow Jones
Markets, Inc. and the Company, as amended
(TRADESTATION Agreement)./dagger/
10.4 Software License, Maintenance and
Development Agreement between Dow Jones
Markets, Inc. and the Company (SUPERCHARTS
Agreement). /dagger/
10.5 Standard Office Building Lease between 8700
Flagler, Ltd. and the Company, as amended by
Memorandum of Commencement Date. /dagger/
10.6 S Corporation Tax Allocation and
Indemnification Agreement. /bullet/
10.7 Form of Indemnification Agreement. /dagger/
33
<PAGE>
10.8 Omega Research, Inc. 1997 Employee Stock
Purchase Plan./bullet/*
10.9 Form of non-competition agreement. /dagger/
10.10 Letter Agreement dated October 27, 1997 from
Dow Jones Markets, Inc. to Omega Research,
Inc. (filed herewith).
23.1 Consent of Arthur Andersen LLP (filed
herewith).
27.1 Financial Data Schedule (filed herewith).
----------------------------------
/dagger/ Previously filed as part of Registration
Statement No. 333-3207 on Form S-1 filed
with the Commission on July 25, 1997.
/bullet/ Previously filed as part of Amendment No. 1
to Registration Statement No. 333-3207 filed
with the Commission on August 25, 1997.
* Indicates a management contract or
compensatory plan or arrangement.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company
during the quarter ended December 31, 1997.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OMEGA RESEARCH, INC.
By: /s/ WILLIAM R. CRUZ
-------------------------------------------
William R. Cruz
Co-Chairman of the Board of Directors and
Co-Chief Executive Officer
By: /s/ RALPH L. CRUZ
-------------------------------------------
Ralph L. Cruz
Co-Chairman of the Board of Directors and
Co-Chief Executive Officer
Dated: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ WILLIAM R. CRUZ Co-Chairman of the Board and March 27, 1998
- ------------------------------- Co-Chief Executive Officer
William R. Cruz (Co-Principal Executive Officer)
/s/ RALPH L. CRUZ Co-Chairman of the Board and March 27, 1998
- ------------------------------ Co-Chief Executive Officer
Ralph L. Cruz (Co-Principal Executive Officer)
/s/ SALOMON SREDNI Vice President of Operations, March 27, 1998
- ------------------------------ Chief Financial Officer and Director
Salomon Sredni (Principal Financial and Accounting Officer)
/s/ CHRISTOS M. COTSAKOS Director March 27, 1998
- ------------------------------
Christos M. Cotsakos
/s/ BRIAN D. SMITH Director March 27, 1998
- ------------------------------
Brian D. Smith
/s/ PETER A. PARANDJUK Director March 27, 1998
- -------------------------------
Peter A. Parandjuk
/s/ MARC J. STONE Director March 27, 1998
- -------------------------------
Marc J. Stone
</TABLE>
35
<PAGE>
OMEGA RESEARCH, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
PAGE
<S> <C>
Report of Independent Certified Public Accountants .......................................... F-2
Balance Sheets as of December 31, 1997 and 1996.............................................. F-3
Statements of Income for the years ended December 31, 1997, 1996 and 1995.................... F-4
Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995...... F-5
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................ F-6
Notes to Financial Statements................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
Omega Research, Inc.:
We have audited the accompanying balance sheets of Omega Research, Inc. (a
Florida corporation) as of December 31, 1997 and 1996, and the related
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion of these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Omega Research, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Miami, Florida,
January 23, 1998.
F-2
<PAGE>
OMEGA RESEARCH, INC.
BALANCE SHEETS
<TABLE>
December 31,
----------------------------------
1997 1996
---------------- --------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 12,323,515 $ 141,633
Marketable securities 1,014,590 -
Accounts receivable, net 9,438,218 4,357,048
Inventories 146,821 92,188
Other current assets 520,537 5,690
Deferred income taxes 2,963,000 -
------------ -----------
Total current assets 26,406,681 4,596,559
PROPERTY AND EQUIPMENT, net 971,511 1,085,112
OTHER ASSETS 91,626 121,657
------------ -----------
Total assets $ 27,469,818 $ 5,803,328
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,119,202 $ 482,662
Accrued expenses 608,947 485,189
Income taxes payable 509,000 -
------------ -----------
Total current liabilities 2,237,149 967,851
------------ -----------
COMMITMENTS & CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000 shares
authorized, none issued and outstanding - -
Common stock, $.01 par value; 100,000,000
shares authorized, 22,246,108 and 19,480,000
issued and outstanding at December 31, 1997
and 1996, respectively 222,461 194,800
Additional paid-in capital 23,745,251 2,517
Retained earnings 1,264,957 4,638,160
------------ -----------
Total shareholders' equity 25,232,669 4,835,477
------------ -----------
Total liabilities and shareholders' equity $ 27,469,818 $ 5,803,328
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
OMEGA RESEARCH, INC.
STATEMENTS OF INCOME
<TABLE>
Year Ended December 31,
------------------------------------------------------
1997 1996 1995
------------ ------------ -----------
REVENUES:
<S> <C> <C> <C>
Licensing fees $ 24,364,990 $ 13,943,234 $ 7,912,502
Other revenues 4,861,284 3,876,928 1,501,911
------------ ------------ -----------
Total revenues 29,226,274 17,820,162 9,414,413
------------ ------------ -----------
OPERATING EXPENSES:
Cost of licensing fees 1,848,993 1,716,884 875,700
Product development 1,890,392 1,041,131 651,432
Sales and marketing 11,272,290 5,617,931 3,560,970
General and administrative 5,420,760 2,421,638 1,038,088
------------ ------------ -----------
Total operating expenses 20,432,435 10,797,584 6,126,190
------------ ------------ -----------
Income from operations 8,793,839 7,022,578 3,288,223
OTHER INCOME, net 146,474 59,436 23,724
------------ ------------ -----------
Income before income taxes 8,940,313 7,082,014 3,311,947
INCOME TAX BENEFIT (934,000) - -
------------ ------------ -----------
Income before pro forma income
tax adjustments 9,874,313 7,082,014 3,311,947
PRO FORMA INCOME TAX
ADJUSTMENTS (Note 1):
Pro forma income taxes for periods
prior to September 30, 1997 3,255,731 2,797,396 1,308,219
Non-recurring tax credit 1,167,000 - -
------------ ------------ -----------
Pro forma net income $ 5,451,582 $ 4,284,618 $ 2,003,728
============ ============ ===========
PRO FORMA EARNINGS PER
SHARE (Note 8):
Basic $ 0.27 $ 0.22 $ 0.10
============ ============ ===========
Diluted $ 0.26 $ 0.21 $ 0.10
============ ============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
OMEGA RESEARCH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
Common Stock Additional
------------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- ------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 19,480,000 $ 194,800 $ - $ 1,618,760 $ (2,250) $ 1,811,310
Cash distributions to shareholders - - - (2,153,000) - (2,153,000)
Net income - - - 3,311,947 - 3,311,947
---------- ------------ ------------ ------------ ---------- ------------
BALANCE, December 31, 1995 19,480,000 194,800 - 2,777,707 (2,250) 2,970,257
Retirement of treasury stock - - (2,250) - 2,250 -
Compensation expense on stock
option grants - - 4,767 - - 4,767
Cash distributions to shareholders - - - (5,221,561) - (5,221,561)
Net income - - - 7,082,014 - 7,082,014
---------- ------------ ------------ ------------ ---------- ------------
BALANCE, December 31, 1996 19,480,000 194,800 2,517 4,638,160 - 4,835,477
Issuance of common stock 2,766,108 27,661 27,412,784 - - 27,440,445
Cash distributions to shareholders, net - - - (16,532,826) - (16,532,826)
Non-cash distributions to shareholders - - - (506,781) - (506,781)
Conversion from S corporation to
C corporation - - (3,792,091) 3,792,091 - -
Compensation expense on stock
option grants - - 122,041 - - 122,041
Net income - - - 9,874,313 - 9,874,313
---------- ------------ ------------ ------------ ---------- ------------
BALANCE, December 31, 1997 22,246,108 $ 222,461 $ 23,745,251 $ 1,264,957 $ - $ 25,232,669
========== ============ ============ ============ ========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
OMEGA RESEARCH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
---------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Income before pro forma income tax adjustments $ 9,874,313 $ 7,082,014 $ 3,311,947
Adjustments to reconcile income before pro forma income
tax adjustments to net cash provided by operating activities:
Depreciation and amortization 606,820 353,852 205,753
Provision for doubtful accounts 2,450,736 830,430 134,000
Compensation expense on stock option grants 122,041 4,767 -
Deferred income tax benefit (2,963,000) - -
(Increase) decrease in:
Accounts receivable (7,531,906) (3,223,458) (1,158,223)
Inventories (54,633) (57,465) 8,082
Other current assets (514,847) (558) 4,919
Other assets (41,315) (46,800) (2,211)
Increase (decrease) in:
Accounts payable 636,540 278,739 (86,175)
Accrued expenses 123,758 371,284 18,472
Income taxes payable 509,000 - -
---------------- --------------- ---------------
Net cash provided by operating activities 3,217,507 5,592,805 2,436,564
---------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (899,296) (530,733) (240,310)
Capitalized software development costs (29,358) (10,346) (61,000)
Purchases of marketable securities (1,014,590) - -
Proceeds from maturities of investments - - 200,489
---------------- --------------- ---------------
Net cash used in investing activities (1,943,244) (541,079) (100,821)
---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 27,440,445 - -
Distributions to shareholders, net (16,532,826) (5,221,561) (2,153,000)
Proceeds from borrowings of short-term debt 15,000,000 - -
Repayment of borrowings of short-term debt (15,000,000) - -
---------------- --------------- ---------------
Net cash provided by (used in) financing activities 10,907,619 (5,221,561) (2,153,000)
---------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 12,181,882 (169,835) 182,743
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 141,633 311,468 128,725
---------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,323,515 $ 141,633 $ 311,468
================ =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 17,979 $ - $ 1,657
================ =============== ===============
Cash paid for income taxes $ 1,520,000 $ - $ -
================ =============== ===============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTION:
Effective June 30, 1997, the Company declared a dividend distributing land
and a building with a carrying value of $506,781, to its shareholders.
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Omega Research, Inc. (the "Company"), a Florida corporation, was
incorporated in 1982 to develop, market and sell investment analysis software to
investors. The Company's principal products allow investors to historically test
and computer automate trading strategies.
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of December 31,
1997, cash and cash equivalents consists primarily of overnight investments, tax
exempt commercial paper and short-term municipal bonds with an original maturity
of three months or less. As of December 31, 1996, cash and cash equivalents
consisted primarily of interest-bearing deposits.
MARKETABLE SECURITIES
Marketable securities consist of investment grade municipal bonds maturing
within a year. The cost of these investments approximates fair market value and
management has designated the securities as available for sale. As a result,
unrealized gains and losses, net of tax, are computed on the basis of average
cost and are included in shareholders' equity.
ACCOUNTS RECEIVABLE
Accounts receivable are principally from individuals, distributors and
retailers of the Company's products. The Company performs periodic credit
evaluations and maintains allowances for potential credit losses of
approximately $3.2 million, and $830,000 at December 31, 1997 and 1996,
respectively, and allowances for potential returns of approximately $4.2 and
$1.8 million at December 31, 1997 and 1996, respectively.
The Company provides all customers with a 30-day right of return, and as a
result, records a provision for returns at the time of sale. The Company,
depending on the circumstances, permits customers to return products after the
30-day period in order to maintain as high a level of customer satisfaction as
possible. The reserve for returns and the provision for bad debts, in accordance
with generally accepted accounting principles, are estimated based on historical
experience and other relevant information. There is no certainty that future
returns or bad debts will not exceed established estimates. In addition, the
Company is subject to rapid changes in technology and shifts in consumer demand
which could result in product returns, in the near term, that are materially
different than the Company's reserves provided.
F-7
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, marketable securities,
accounts receivable and accounts payable approximate fair value as of December
31, 1997 and 1996.
INVENTORIES
Inventories, which consist primarily of software media, manuals and related
packaging materials, are stated at the lower of cost or market with cost
determined on a first-in, first-out ("FIFO") basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using straight-line method over the
estimated useful lives of the assets.
Maintenance and repairs are charged to expense when incurred; betterments
are capitalized. Upon the sale or retirement of assets, the cost and accumulated
depreciation are removed from the accounts, and any gain or loss is recognized
currently.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, ACCOUNTING FOR THE COST OF CAPITALIZED SOFTWARE TO BE SOLD, LEASED OR
OTHERWISE MARKETED, the Company examines its software development costs after
technological feasibility has been established to determine the amount of
capitalization that is required. Based on the Company's product development
process, technological feasibility is established upon completion of a working
model. The costs that are capitalized are amortized on the straight-line basis
over a one-year period, the period of benefit, of the related products. For
certain periods, the technological feasibility of the Company's products and the
general release of such software substantially coincide, and, as a result,
software development costs qualifying for capitalization are immaterial. There
are no capitalized software development costs as of December 31, 1997.
Capitalized software development costs, net of amortization, were approximately
$71,000 at December 31, 1996.
LONG LIVED ASSETS
The Company adopted SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF, in 1996. SFAS No. 121
establishes accounting standards to recognize the impairment of long-lived
assets, certain identifiable intangibles and goodwill. The adoption did not have
an impact on the Company's results of operations and financial position.
F-8
<PAGE>
REVENUE RECOGNITION
LICENSING FEES
Sales, net of provisions for estimated returns, are recognized at the time
the product is shipped, in accordance with the provisions of the AICPA Statement
of Position ("SOP") 91-1, SOFTWARE REVENUE RECOGNITION. While the Company has no
obligation to perform future services subsequent to shipment, the Company
provides telephone customer support as an accommodation to purchasers of its
products as a means of fostering customer satisfaction. The majority of such
services are provided during the first 60 days of ownership of the Company's
products. Costs associated with this effort are generally insignificant in
relation to product sales value.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP 97-2, SOFTWARE
REVENUE RECOGNITION. SOP 97-2 supercedes SOP 91-1. SOP 97-2 requires companies
to defer revenue and profit recognition if four required criteria of a sale are
not met. In addition, SOP 97-2 requires revenue recognized from software
arrangements to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation, or training. SOP
97-2 will be adopted by the Company effective January 1, 1998. Management does
not believe that the adoption of SOP 97-2 will have a material impact on the
Company's financial position or results of operations.
Since its introduction in 1991, sales of TRADESTATION have accounted for a
majority of the Company's total revenues and are expected to continue to account
for a substantial portion of such revenues for the foreseeable future. As a
result, any factor resulting in price reductions of, or declines in demand for,
TRADESTATION would have a material adverse effect on the Company's business,
financial condition and results of operations.
OTHER REVENUES
The Company has entered into various agreements with entities that market
and sell financial market data feed subscriptions. Except for the agreements
described in Note 9, the Company receives, in certain cases, monthly payments
based on the use by the Company's customers of financial market data feed
subscriptions which are accessed through one of the Company's products. The
Company records these revenues as they are earned in accordance with the terms
of the applicable contracts.
ADVERTISING COSTS
Advertising costs are expensed when the initial advertisement is run and are
included in sales and marketing expenses in the accompanying statements of
income.
STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, in
accounting for stock-based transactions with non-employees, the Company records
compensation expense in the statement of income when these types of options are
issued. As permitted by SFAS No. 123, the Company accounts for its stock-based
compensation paid to employees in accordance with Accounting Principles Board
("APB") Opinion No. 25.
F-9
<PAGE>
INCOME TAXES
For income tax purposes, the Company was an S corporation prior to September
30, 1997. Accordingly, net income and related timing differences which arise in
the recording of income and expense items for financial reporting and tax
reporting purposes were included in the individual tax returns of the S
corporation shareholders. Effective September 30, 1997, the Company terminated
its S corporation election, and, as a result, adopted SFAS No. 109, ACCOUNTING
FOR INCOME TAXES. SFAS No. 109 requires that deferred income tax balances be
recognized based on the differences between the financial statement and income
tax bases of assets and liabilities using the enacted tax rates.
PRO FORMA INCOME TAX ADJUSTMENTS
The pro forma income tax adjustments included in the accompanying statements
of income are for informational purposes only. Income taxes have been provided
at the estimated effective rate of 39.5% for periods prior to September 30,
1997. In addition, a non-recurring tax credit of $1.2 million has been excluded
from pro forma net income (see Note 7).
PRO FORMA EARNINGS PER SHARE
The Company adopted SFAS No. 128, EARNINGS PER SHARE, which changes the
method of calculating earnings per share, during the fourth quarter of 1997.
SFAS No. 128 requires a dual presentation of basic and diluted earnings per
share on the face of the income statement. Basic earnings per share is computed
by dividing the net income available to common shareholders by the weighted
average shares of outstanding common stock. The calculation of diluted earnings
per share is similar to basic earnings per share except that the denominator
includes dilutive common stock equivalents such as stock options and warrants.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Such
estimates include established reserves for returns and reserves for potentially
uncollectable accounts receivable.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, REPORTING COMPREHENSIVE INCOME, and No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components, which will be presented in association
with a company's financial statements. Comprehensive income is defined as the
change in a business enterprise's equity during a period arising from
transactions, events or
F-10
<PAGE>
circumstances relating to non-owner sources, such as foreign currency
translation adjustments and unrealized gains or losses on available-for-sale
securities. It includes all changes in equity during a period except those
resulting from investments by or distributions to owners. SFAS No. 130 is
effective as of March 31, 1998.
SFAS No. 131 establishes standards for the way that public companies report
selected information about operating segments in annual and interim financial
reports to shareholders. It also establishes standards for related disclosures
about an enterprise's business segments, products, services, geographic areas,
and major customers. SFAS No. 131, which supersedes SFAS No. 14, FINANCIAL
REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE, but retains the requirement to
report information about major customers, requires that a public company report
financial and descriptive information about its reportable operating segments.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. SFAS No. 131 requires that a public company
report a measure of segment profit or loss, certain specific revenue and expense
items, and segment assets. SFAS No. 131 is effective as of December 31, 1998.
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
<TABLE>
Useful Life
in Years 1997 1996
-------- ---- ----
<S> <C> <C> <C>
Land - $ - $ 47,034
Building and improvements 35 - 559,119
Computers and software 3 1,553,091 913,052
Furniture and equipment 5 445,909 284,625
Leasehold improvements 5 97,976 -
Autos 5 110,205 110,205
------------- ------------
2,207,181 1,914,035
Accumulated depreciation and amortization (1,235,670) (828,923)
------------- -------------
$ 971,511 $ 1,085,112
============= ============
</TABLE>
(3) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Payroll and related accruals $ 314,378 $ 262,268
Accrued technical support costs 165,666 120,000
Other 128,903 102,921
--------- ---------
$ 608,947 $ 485,189
========= =========
</TABLE>
F-11
<PAGE>
(4) SHAREHOLDERS' EQUITY
SHARE SPLIT
Effective January 29, 1997, the Company authorized an increase in the amount
of its authorized common stock to 100 and changed the par value of each share to
$.01. In addition, on January 30, 1997, the Company declared a 97,400-for-1
split of its outstanding common stock. The split has been retroactively
reflected in the financial statements for all periods presented.
PREFERRED STOCK
On July 16, 1997, the Company authorized 25 million shares of preferred
stock with a par value of $.01 per share. No specific preferences or rights have
been established to date with respect to any of these shares nor have any of
these shares been issued.
INITIAL PUBLIC OFFERING
On October 6, 1997, the Company closed on its initial public offering of 2.6
million shares of common stock of the Company at $11.00 per share (the "Initial
Public Offering"). On November 5, 1997, the Company closed on the underwriters'
purchase of 158,108 additional shares of common stock pursuant to the exercise
of a portion of their over-allotment option granted in the Initial Public
Offering. Total proceeds to the Company, net of underwriting discounts and
offering expenses of approximately $2.9 million, were $27.4 million.
DISTRIBUTIONS TO SHAREHOLDERS
On September 30, 1997, the Company terminated its S corporation status and
the Company became a C corporation making it subject to federal and state income
taxes on its earnings. In conjunction with the Company becoming a C corporation,
the Company declared and paid a cash dividend payable to the Company's existing
shareholders of $15.4 million (the "Dividend"). The Dividend was equal to the
Company's estimate at that time of its cumulative taxable income prior to its
conversion to a C corporation to the extent such taxable income had not been
previously distributed. Subsequent to the payment of the Dividend, the Company
preliminarily determined that the actual cumulative taxable income would be less
than was originally estimated. Accordingly, in the fourth quarter of 1997, the
recipients of the Dividend repaid $800,000, plus interest, to the Company,
reducing the Dividend to $14.6 million. It is expected that the amount of the
Dividend will be further adjusted during 1998 based upon the finalization of the
Company's 1997 tax returns and final determination of S corporation earnings at
the date of conversion to a C corporation.
F-12
<PAGE>
STOCK OPTION PLANS
The Company has reserved 3,000,000 shares of its common stock for issuance
under its Amended and Restated 1996 Incentive Stock Plan (the "Option Plan").
Under the Option Plan, incentive and nonqualified stock options, stock
appreciation rights, stock awards, performance shares and performance units are
available to employees or consultants of the Company. Currently, only options
have been granted. The terms of each option agreement are determined by the
Compensation Committee of the Board of Directors. The exercise price of
incentive stock options may not be less than fair market value at the date of
grant and their terms may not exceed ten years. The options issued under the
Plan generally vest ratably over a five-year period.
The Company has reserved 175,000 shares of its common stock for issuance
under its 1997 Director Stock Option Plan, as amended (the "Director Plan").
Under the Director Plan, an independent director is awarded an initial grant of
up to 75,000 non-qualified stock options and annual grants of up to 3,000
non-qualified stock options. The terms of each option grant are determined by
the Board of Directors.
A summary of stock option activity is as follows:
<TABLE>
Option Price Per Share
Number ------------------------------------
of Shares Low High Weighted
--------- --- ---- --------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1995 - - - -
Granted 582,000 $ 1.25 $ 1.25 $ 1.25
-----------
Outstanding, December 31, 1996 582,000 1.25 1.25 1.25
Granted 559,175 1.25 11.00 4.90
Cancelled (25,350) 2.00 11.00 3.51
Exercised (8,000) 1.25 1.25 1.25
-----------
Outstanding, December 31, 1997 1,107,825 1.25 11.00 3.04
===========
</TABLE>
Additional information regarding options outstanding at December 31, 1997
is as follows:
<TABLE>
Options Outstanding Options Exercisable
Range of ------------------------------------------------ ----------------------------------
Exercisable Number Weighted Weighted Number Weighted
Prices Outstanding Average Average Exercisable Average
- ---------------------- as of Contractual Exercise as of Exercise
Low High 12/31/97 Life Price 12/31/97 Price
- ----------- -------- ---------------- --------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.25 $ 2.50 684,650 8.94 $ 1.36 108,400 $ 1.25
3.00 5.00 270,000 9.67 3.92 - -
6.00 7.25 75,500 9.63 6.98 - -
11.00 11.00 77,675 9.75 1.00 2,500 11.00
------ -------- --------- ---- ------- ------- --------
$ 1.25 $ 11.00 1,107,825 9.22 $ 3.04 110,900 $ 1.47
====== ======== ========= ==== ======= ======= ========
</TABLE>
F-13
<PAGE>
All options issued during 1996 were issued to key employees at an exercise
price that was subsequently determined to be approximately $291,000 below fair
market value at the date of grant as determined by an independent appraisal.
Several of the options issued during 1997 were determined to be, in the
aggregate, approximately $341,000 below fair value as determined by an
independent appraisal. These differences are being amortized over the five-year
vesting period of the related stock options. For the years ended December 31,
1997 and 1996, the Company recorded compensation expense of approximately
$122,000 and $5,000, respectively. Included in compensation expense in 1997, was
approximately $23,000 related to options issued to a consultant of the Company,
accounted for under the provisions of SFAS No. 123. Options to purchase 110,900
shares were exercisable at December 31, 1997. No options were exercisable at
December 31, 1996.
The Company, as permitted by SFAS No. 123, applies the APB Opinion No. 25
for options granted to employees. Accordingly, no compensation is recognized for
such grants to the extent their exercise price is equal to the fair market value
of the underlying stock at the date of grant. Had compensation cost for the
Company's stock options been based on fair value at the grant dates consistent
with the methodologies of SFAS No. 123, the Company's pro forma net income (and
pro forma earnings per share on a diluted basis) for the years ended December
31, 1997 and 1996 would have been approximately $5.2 million ($0.25 per share)
and $4.3 million ($0.21 per share), respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following assumptions: expected volatility of
70% for options issued prior to the Initial Public Offering and 81% for options
issued on or after the Initial Public Offering, risk-free interest rate of 7.0%,
no expected dividends and expected terms of seven years.
EMPLOYEE STOCK PURCHASE PLAN
In July 1997, the Board of Directors of the Company adopted and the
shareholders approved the 1997 Employee Stock Purchase Plan (the "Purchase
Plan") and reserved 500,000 shares of common stock pursuant to the exercise of
nontransferable options granted to participating employees. The exercise price
for the option for each six-month Purchase Plan period is 85% of the lesser of
the fair market value of the Company's common stock on the first or last
business day of the Purchase Plan period. The Purchase Plan provides for the
first options to be granted for the Purchase Plan Period commencing January 1,
1998.
(6) EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits through a defined contribution
401(k) plan (the "401(k) Plan") which was established during 1994. Employees
become eligible based upon meeting certain service requirements. The Company
matches employee contributions based upon a formula defined in the 401(k) Plan.
Matching contributions accrued under the 401(k) Plan amounted to approximately
$63,000, $62,000 and $16,000 in 1997, 1996 and 1995, respectively.
F-14
<PAGE>
(7) INCOME TAXES
The components of income tax benefit for the year ended December 31, 1997
are as follows:
Current taxes:
Federal $ 1,739,894
State 289,106
-----------
Total current taxes 2,029,000
-----------
Deferred tax benefit:
Federal (2,540,811)
State (422,189)
-----------
Total deferred tax benefit (2,963,000)
---------
Total income tax benefit $ (934,000)
===========
Deferred income taxes are recorded when revenues and expenses are recognized
in different periods for financial statement and tax return purposes. The
temporary differences that created deferred income taxes are as follows:
Deferred tax assets:
Reserves and allowances $2,900,000
Other 283,000
----------
Total deferred tax assets 3,183,000
Valuation allowance (220,000)
-----------
Deferred income taxes, net $2,963,000
===========
The difference between the reported income tax benefit for the year ended
December 31, 1997 and the provision computed by applying the statutory federal
rate currently in effect, is primarily due to recognition by the Company of a
non-recurring net benefit for income taxes of $1.2 million upon adoption of SFAS
No. 109 during the third quarter of 1997, as well as the fact that no income
taxes were provided during the first nine months of 1998, while the Company was
an S corporation for income tax reporting purposes.
The $1.2 million benefit for income taxes recorded during the third quarter
of 1997 is comprised of a non-recurring deferred income tax credit (the "SFAS
109 Credit") of approximately $3.0 million partially offset by a $1.8 million
provision for income taxes payable. The SFAS 109 Credit recognized net deferred
tax assets arising from book and tax basis differences that arose primarily as a
result of accounts receivable reserves. The $1.8 million in income taxes payable
relate to federal and state income taxes owed by the Company as a result of an
approximate $4.6 million in S corporation taxable earnings to be recognized for
tax purposes during 1997 and 1998. Approximately $900,000 of such taxes payable
was paid by the Company in 1997.
F-15
<PAGE>
(8) PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share is calculated as follows:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma net income available to
common shareholders $ 5,451,582 $ 4,284,618 $ 2,003,728
Weighted average shares outstanding 20,171,527 19,480,000 19,480,000
Impact of dilutive options after applying
the treasury stock method 713,148 1,061,000 1,061,000
------------ ----------- ------------
Shares outstanding (diluted) 20,884,675 20,541,000 20,541,000
------------ ----------- ------------
Per share amounts:
Basic $ 0.27 $ 0.22 $ 0.10
======== ======== ========
Diluted $ 0.26 $ 0.21 $ 0.10
======== ======== ========
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has three non-cancellable operating leases for facilities. The
only significant operating lease is for five and one-half years and commenced in
February 1997. Future minimum lease payments as of December 31, 1997 under all
operating leases are as follows:
1998 $ 282,922
1999 265,638
2000 271,942
2001 280,586
2002 178,293
------------
$ 1,279,381
============
Total rent expense for 1997 and 1996 was approximately $256,000 and $47,000,
respectively. There was no rent expense during 1995.
DOW JONES MARKETS ROYALTY AGREEMENTS
The Company has entered into a Software License, Maintenance and Development
Agreement (the "Agreement") with Dow Jones Markets, Inc. ("Dow Jones Markets").
Under the Agreement, the Company modified one of its software products to create
a Dow Jones Markets version. Also, the Company granted Dow Jones Markets a
license to promote, market, sublicense and distribute the Dow Jones Markets
version for six years. During 1997 and 1996, the Company earned approximately
$2.2 and $1.5 million, respectively, in royalties (based upon minimum royalty
requirements) under the terms of this Agreement. In March 1997, the Company
entered into a similar agreement (but without minimum royalty requirements) with
Dow Jones Markets concerning one of its other software products. Marketing of
such other product under that agreement has not yet begun.
F-16
<PAGE>
LITIGATION
On January 28, 1998, a class action lawsuit, captioned RICHARD M. RHODES V.
WILLIAM R. CRUZ; RALPH L. CRUZ; OMEGA RESEARCH, INC.; BANCAMERICA ROBERTSON
STEPHENS; LEHMAN BROTHERS; AND HAMBRECHT & QUIST (Case No. 98-0174-CIV-Lenard),
was filed in the United States District Court for the Southern District of
Florida. The suit alleges that the defendants violated Section 11 of the
Securities Act of 1933 (the "Securities Act") by allegedly making
misrepresentations and omissions of material facts in connection with the
Initial Public Offering of the Company's Common Stock and in connection with the
Company's financial condition. The alleged misrepresentations and omissions
concern, among other things, the receipt of proceeds of the Initial Public
Offering by William R. Cruz and Ralph L. Cruz and the Company's TRADESTATION
sales. The suit also alleges that William R. Cruz and Ralph L. Cruz violated
Section 15 of the Securities Act based on the same alleged conduct as described
above.
The plaintiff seeks certification of a class consisting of all persons who
purchased the Company's Common Stock in the Initial Public Offering or between
October 4, 1997 and January 6, 1998, inclusive. Excluded from the class are the
defendants, members of their immediate families, any persons, firm, trust
corporation, officer or director or other individual or entity in which a
defendant has a controlling interest or which is related to or affiliated with a
defendant and the legal representatives, agents, affiliates, heirs, successors
in interest or assigns of any such excluded party. On behalf of himself and the
class, the plaintiff seeks damages, interest, costs and expenses, including
attorneys' and experts' fees and other appropriate relief. The Company believes
that this lawsuit is without merit and intends to contest the lawsuit
vigorously.
In addition to the above, from time to time, the Company may become engaged
in ordinary routine litigation incidental to its business. The Company does not
believe that such ordinary routine litigation would have a material adverse
effect on its financial position or results of operations.
F-17
<PAGE>
OMEGA RESEARCH, INC.
<TABLE>
INDEX TO FINANCIAL STATEMENT SCHEDULE
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants on Schedule................................. S-2
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1997,
1996 and 1995.................................................................................. S-3
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To the Shareholders of
Omega Research, Inc.:
We have audited in accordance with generally accepted auditing standards
the financial statements included in this Form 10-K and have issued our report
thereon dated January 23, 1998. Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The accompanying
Schedule II is the responsibility of the Company's management and is presented
for the purposes of complying with the Securities and Exchange Commission's
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida
January 23, 1998
S-2
<PAGE>
OMEGA RESEARCH, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ----------- ------------ -----------
YEAR ENDED DECEMBER 31, 1997:
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 830,430 $ 2,450,736 $ (52,000) $ 3,229,166
Allowance for returns 1,797,000 15,737,063 (13,384,063) 4,150,000
----------- ----------- ------------ -----------
Allowance for doubtful accounts and returns $ 2,627,430 $18,187,799 $(13,436,063) $ 7,379,166
=========== =========== ============ ===========
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful accounts $ 134,000 $ 830,430 $ (134,000) $ 830,430
Allowance for returns 252,000 5,340,000 (3,795,000) 1,797,000
----------- ----------- ------------ -----------
Allowance for doubtful accounts and returns $ 386,000 $ 6,170,430 $ (3,929,000) $ 2,627,430
=========== =========== ============ ===========
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful accounts $ 117,000 $ 134,000 $ (117,000) $ 134,000
Allowance for returns 154,000 1,415,000 (1,317,000) 252,000
----------- ----------- ------------ -----------
Allowance for doubtful accounts and returns $ 271,000 $ 1,549,000 $ (1,434,000) $ 386,000
=========== =========== ============ ===========
</TABLE>
S-3
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
<S> <C>
10.2 - Omega Research, Inc. 1997 Nonemployee Director Stock Option
Plan, as amended (filed herewith).
10.10 _ Letter Agreement dated October 27, 1997 from Dow Jones
Markets, Inc. to Omega Research, Inc. (filed herewith).
23.1 - Consent of Arthur Andersen LLP (filed herewith).
27.1 - Financial Data Schedule (filed herewith).
</TABLE>
EXHIBIT 10.2
OMEGA RESEARCH, INC.
1997 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN*
1. PURPOSE. OMEGA RESEARCH, INC., a Florida corporation (the
"Company"), hereby adopts the 1997 Nonemployee Director Stock Option Plan (the
"Plan"). The purpose of the Plan is to attract and retain outstanding
individuals to serve as members of the Board of Directors of the Company by
providing such persons opportunities to acquire common stock, $.01 par value, of
the Company ("Common Shares"), thereby strengthening the mutuality of interest
between such persons and the Company's shareholders.
2. SHARES RESERVED UNDER THE PLAN. There is hereby reserved for
issuance under the Plan an aggregate of One Hundred Seventy-Five Thousand
(175,000) Common Shares, which shall be authorized but unissued shares. If there
is a lapse, expiration, termination or cancellation of any option granted under
the Plan, all unissued shares subject to or reserved for such option may again
be used for new options granted under the Plan.
3. PARTICIPATION. Participation in the Plan is limited to members of
the Board of Directors who are not salaried officers or employees of the Company
or any of its direct or indirect subsidiaries (a "Nonemployee Director" or
"Participant").
4. OPTIONS TO BE GRANTED UNDER THE PLAN. Effective on or about the date
of a Nonemployee Director's initial election to the Board of Directors, each
Nonemployee Director may be awarded nonqualified stock options to purchase up to
a maximum of Seventy-Five Thousand (75,000) Common Shares (the "Initial
Option"). The actual number of stock options awarded to each Nonemployee
Director comprising the Initial Option shall be determined by the Board of
Directors as it deems necessary or advisable and in the best interests of the
Company in order to attract and obtain outstanding and highly qualified
candidates to serve on the Company's Board of Directors. Upon each re-election
of such Nonemployee Director to the Board of Directors at the Company's annual
meeting of shareholders ("Annual Meeting"), each Nonemployee Director shall
automatically be awarded an additional nonqualified stock option (the
"Additional Option") to purchase Three Thousand (3,000) Common Shares, provided,
however, that a Nonemployee Director shall not be granted such Additional Option
upon such re-election if such Nonemployee Director was granted an Initial Option
in the immediately preceding twelve (12)-month period upon his or her initial
election to the Board of Directors in accordance with this Section 4. The
Company is authorized to provide the Participant with a stock option agreement
consistent with the terms of the Plan.
5. OPTION EXERCISE PRICE. Each option granted under the Plan shall be
exercisable at an option price equal to 100% of the Fair Market Value (as
defined in Section 10 hereof) of the Common Shares on the date of grant
hereunder.
- --------------------
* Section 4 of the Omega Research, Inc. 1997 Non-Employee Director Stock
Option Plan was amended by the Board of Directors on January 2, 1998. Section 4,
as amended and restated, is included herein.
<PAGE>
6. LIMITATIONS ON EXERCISE. Any option granted under the Plan may be
exercised (in accordance with Section 7 hereof) in whole or in part, from time
to time after the date granted, subject to the following limitations:
(a) No option granted hereunder may be exercised during the
first year following the date such option was granted. Thereafter, each option
may be exercised:
(i) to a maximum cumulative extent of one-third (1/3)
of the total shares covered by the option on or after the first
anniversary of the date the option was granted;
(ii) to a maximum cumulative extent of two-thirds
(2/3) of the total shares covered by the option on or after the second
anniversary of the date the option was granted; and
(iii) to a maximum cumulative extent of 100% of the
total shares covered by the option on or after the third anniversary of
the date the option was granted.
(b) Notwithstanding the limitations of Section 6(a) above, any
option granted under the Plan shall become fully exercisable upon the death of
the Nonemployee Director while serving on the Board of Directors or upon the
Retirement (as hereinafter defined in this Section 6(b)) of the Nonemployee
Director if such death or Retirement occurs on or after the first anniversary of
the date such option was issued. For these purposes, "Retirement" means a
Nonemployee Director's termination of service as a member of the Board of
Directors after age 70 or at any time with the consent of the Board of
Directors.
(c) Any option granted under the Plan shall not be exercised
after the earliest to occur of any of the following events:
(i) more than ninety (90) days after termination of
any Nonemployee Director's service as a member of the Board of
Directors for any reason other than death or Retirement (and then only
to the extent that such Nonemployee Director could have exercised such
option on the date of termination);
(ii) more than one hundred eighty (180) days after a
Nonemployee Director's Retirement from the Board of Directors (and then
only to the extent that such Nonemployee Director could have exercised
such option on the date of Retirement, after giving effect to Section
6(b) above);
2
<PAGE>
(iii) more than twelve (12) months after death of a
Nonemployee Director (and then only to the extent that such Nonemployee
Director could have exercised such option on the date of death, after
giving effect to Section 6(b) above); or
(iv) more than ten (10) years from the date the
option is granted.
7. METHOD AND TIME OF EXERCISE: DELIVERY OF CERTIFICATES. Any option
granted under the Plan shall be deemed exercised on the date written notice of
exercise is received by the Secretary of the Company at the Company's corporate
headquarters. Such notice shall be accompanied by: (a) a check payable to the
Company for the purchase price of the shares to be purchased; or (b) delivery of
Common Shares owned by the Participant for at least six (6) months whose Fair
Market Value on the date of exercise equals the purchase price of the shares to
be purchased; or (c) any combination of the foregoing.
8. NONTRANSFERABILITY. Any option granted under this Plan shall not be
transferable other than as required by law or by will or the laws of descent and
distribution, and shall be exercisable, during the Participant's lifetime, only
by the Participant or the Participant's guardian or legal representative. If a
Nonemployee Director dies during the option period, any option granted to such
Participant may be exercised by his estate or the person to whom the option
passes by will or the laws of descent and distribution, but only in accordance
with Section 6 above. Notwithstanding the foregoing, an option shall
automatically become transferable to the Participant's "immediate family
members" or trusts or family partnerships for the benefit of such persons. For
purposes of this Section 8, "immediate family members" shall mean the
Participant's spouse and lineal descendants.
9. OTHER PROVISIONS; SECURITIES REGISTRATION. The grant of any option
under the Plan may also be subject to other provisions as counsel to the Company
deems appropriate, including, without limitation, such provisions as may be
appropriate to comply with federal or state securities laws and stock listing
requirements.
10. DEFINITION OF FAIR MARKET VALUE. The term "Fair Market Value" shall
mean, as of any date, the mean between the highest and lowest sale prices of the
Common Shares as reported on the NASDAQ National Market (or such other
consolidated transaction reporting system on which such Common Shares are
primarily traded) on the date immediately preceding the date of grant (or
exercise where applicable), or if such Common Shares were not traded on such
day, then the next preceding day on which the shares were traded, all as
reported by such source as the Board of Directors may determine.
3
<PAGE>
11. ADJUSTMENT PROVISIONS. If the Company shall at any time change the
number of issued Common Shares without new consideration to the Company (such as
by stock dividend or stock split), the total number of shares reserved for
issuance under the Plan and the number of shares covered by each outstanding
option and the exercise price thereunder shall be automatically adjusted so that
the aggregate consideration payable to the Company and the value of each option
shall not be changed. If, during the term of any option granted under the Plan,
the Common Shares shall be changed into another kind of stock, securities, cash
or other property, whether as a result of reorganization, sale, merger,
consolidation, or other similar transaction, the Board of Directors shall cause
adequate provision to be made whereby all Participants shall thereafter be
entitled to receive, upon the due exercise of any outstanding options, the
stock, securities, cash or other property such Participants would have been
entitled to receive immediately prior to the effective date of any such
transaction for Common Shares which could have been acquired through the
exercise of such options.
12. AMENDMENT OR DISCONTINUATION OF PLAN. The Board of Directors may
amend the Plan at any time or suspend or discontinue the Plan at any time, but
no such action shall adversely affect any outstanding option.
13. GOVERNING LAW. The Plan and any options granted hereunder shall be
governed and construed in accordance with the laws of the State of Florida
(regardless of the law that might otherwise govern under applicable Florida
principles of conflicts of laws).
14. SHAREHOLDER APPROVAL. The Plan was adopted by the Board of
Directors and approved by the shareholders of the Company on July 24, 1997.
4
EXHIBIT 10.10
[Dow Jones Logo] Dow Jones Markets
200 Liberty Street
New York, New York 10281
October 27, 1997
Omega Research, Inc.
8700 West Flagler Street
Suite 250
Miami, Florida 33174-2428
Re: MODIFICATIONS TO SOFTWARE LICENSE, MAINTENANCE AND DEVELOPMENT
AGREEMENT DATED MARCH 12, 1997 (THE "SUPERCHARTS AGREEMENT")
BETWEEN DOW JONES MARKETS, INC. ("TELERATE") AND OMEGA RESEARCH,
INC. ("OMEGA"), AND MODIFICATION TO SOFTWARE LICENSE, MAINTENANCE
AND DEVELOPMENT AGREEMENT DATED AUGUST 26, 1994, AS AMENDED BY
FIRST AMENDMENT TO SOFTWARE LICENSE, MAINTENANCE AND
DEVELOPMENT AGREEMENT DATED MARCH 7, 1997 (THE "TRADESTATION
AGREEMENT") BETWEEN TELERATE AND OMEGA
Ladies and Gentlemen:
Reference is made to the SuperCharts Agreement and the TradeStation
Agreement. This letter shall serve to (a) modify certain provisions of the
SuperCharts Agreement and (b) add one subsection to the TradeStation Agreement.
Capitalized terms used herein, which are not otherwise defined herein, shall
have the respective meanings ascribed to them in the SuperCharts Agreement.
The parties agree as follows:
1. SUPERCHARTS AGREEMENT.
(a) Notwithstanding anything to the contrary contained in the
SuperCharts Agreement, Telerate shall have the right, but not the obligation, to
include the Telerate Version of SuperCharts Special Edition in Workstations and
Stand-Alone Units that Telerate, its Affiliates and Independent Distributors
distribute to existing Telerate customers and to future customers such as those
Telerate currently serves. To the extent that Telerate exercises this right,
which it may exercise during the term of this Agreement from time to time and in
whole or in part in Telerate's sole and absolute discretion, all other
provisions of the SuperCharts Agreement relating to, or affecting, the exercise
of such right shall continue to apply, including but not limited to Telerate's
obligation to include the Telerate Version of SuperCharts Special Edition only
on a completely royalty-free basis to the subscriber, customer or end-user and
only in Workstations and Stand-Alone Units. Nothing
<PAGE>
herein shall be deemed to have enlarged or expanded in any manner the license
granted to Telerate in the SuperCharts Agreement concerning the Telerate Version
of SuperCharts Special Edition.
(b) Notwithstanding anything to the contrary contained in the
SuperCharts Agreement, including but not limited to Section E. 1(a), there shall
be no standard which Telerate shall be required to observe in connection with
its marketing efforts regarding the Telerate Version of SuperCharts Products.
Accordingly, Section E. l(a) is hereby amended in its entirety to read as
follows:
"Telerate shall have complete control over, and discretion
in determining the manner of promoting, marketing, selling and/or sublicensing
the Telerate Version of SuperCharts Products."
(c) Section 3 of the SuperCharts Agreement is hereby deleted
and is void and of no further force or effect. The Non-Competition Agreement,
dated March 12, 1997 between William Cruz and Ralph Cruz and Telerate is hereby
cancelled and of no further force or effect. It is expressly understood that the
Non-Competition Covenant (as defined in the March 7, 1997 First Amendment to the
TradeStation Agreement) will remain in full force and effect. Nothing contained
in this letter, including this paragraph (c), will in any way be deemed to be a
waiver by Telerate of its assertion that each of the SuperCharts Products is
subject to the Non-Competition Covenant in the TradeStation Agreement (including
as such Non-Competition Covenant is described in Section 1(a) of the March 7,
1997 First Amendment to the TradeStation Agreement). Telerate acknowledges that
Omega has informed it that Omega disputes Telerate's position on this issue.
(d) The parties acknowledge and confirm that the Telerate
Version of SuperCharts Products has been Accepted. The parties shall continue to
address in good faith and in a manner consistent with past practices any
existing "bugs" which may exist in the Telerate Version of SuperCharts Products.
(e) Except as set forth above, the SuperCharts Agreement
remains unmodified and of full force and effect.
2. TRADESTATION AGREEMENT.
(a) The TradeStation Agreement is hereby amended by adding to
Section E thereof a subsection 4 which reads as follows (with capitalized terms
used therein having the respective meanings ascribed to them in the TradeStation
Agreement):
"4. TRADESTATION SLIDE SHOW DEMO. Effective as soon as
practicable after the date hereof but in no event later than the date on which
the next major version of the Dow Jones Workstation Platform is commercially
released (which is anticipated to occur in January 1998), and continuing
throughout the term of this Agreement, Telerate shall have the obligation to
include in the Dow Jones Workstation Platform (and any upgrades or new releases
thereof), and to distribute (and cause its Affiliates and Independent
Distributors to distribute) to all existing Telerate customers and to future
customers such as those Telerate currently serves to which the Dow Jones
Workstation
<PAGE>
Platform (or any upgrade or new release) is licensed, sold or distributed, as
part thereof, on a completely royalty-free basis to the subscriber, customer or
other end-user, an icon in the Workstation Desktop Manager (which is displayed
on the user's screen after logging in) that runs the TradeStation Slide Show
Demo (as defined below). Telerate's obligation to distribute the TradeStation
Slide Show Demo to existing Dow Jones Workstation subscribers relates only to
upgrades and new releases thereof. "TradeStation Slide Show Demo" shall mean a
slide-show demonstration of the Telerate Version of TradeStation which can be
accessed and displayed by a Workstation computer and which is mutually approved
by both parties in writing, such approval not to be unreasonably withheld. The
parties will cooperate to develop and implement the TradeStation Slide Show Demo
as soon as practicable. Omega hereby grants to Telerate a license to use the
TradeStation Slide Show Demo solely for the purposes and in the manner set forth
in this subsection, and for no other purpose and in no other manner whatsoever.
As between Omega and Telerate, solely Omega owns all right, title and interest
in and to the TradeStation Slide Show Demo.
(b) Except as set forth in the preceding subparagraph (a), the
TradeStation Agreement remains unmodified and of full force and effect.
Please indicate your acceptance of, and agreement to, all of the
foregoing by countersigning this letter in the space provided below for that
purpose.
Very truly yours,
DOW JONES MARKETS, INC.
By: /s/ JULIAN B. CHILDS
------------------------
Julian B. Childs
Executive Vice President
AGREED TO AND ACCEPTED:
OMEGA RESEARCH, INC.
By: /s/ WILLIAM CRUZ
-----------------------
William Cruz, President
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Form S-8 Registration Statement File No. 333-40881.
/s/ ARTHUR ANDERSEN LLP
Miami, Florida,
March 27, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
OMEGA RESEARCH, INC. FINANCIAL DATA SCHEDULE
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE COMPANY'S FINANCIAL
STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER, 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001042814
<NAME> OMEGA RESEARCH, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,323,515
<SECURITIES> 1,014,590
<RECEIVABLES> 16,817,384
<ALLOWANCES> 7,379,166
<INVENTORY> 146,821
<CURRENT-ASSETS> 26,406,681
<PP&E> 2,207,181
<DEPRECIATION> 1,235,670
<TOTAL-ASSETS> 27,469,818
<CURRENT-LIABILITIES> 2,237,149
<BONDS> 0
0
0
<COMMON> 222,461
<OTHER-SE> 25,010,208
<TOTAL-LIABILITY-AND-EQUITY> 27,469,818
<SALES> 24,364,990
<TOTAL-REVENUES> 29,226,274
<CGS> 1,848,993
<TOTAL-COSTS> 17,981,699
<OTHER-EXPENSES> (164,453)
<LOSS-PROVISION> 2,450,736
<INTEREST-EXPENSE> 17,979
<INCOME-PRETAX> 8,940,313
<INCOME-TAX> 3,488,731<F1>
<INCOME-CONTINUING> 5,451,582<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,451,582<F1>
<EPS-PRIMARY> 0.27<F1>
<EPS-DILUTED> 0.26<F1>
<FN>
<F1> Reflects pro forma provision income taxes as if the Company were a C
Corporation subject to Federal and state Corporate income taxes for the
entire year. See Note 1 of Notes to Financial Statements.
</FN>
</TABLE>
